Risk management of the future: The road ahead for risk managers

Risk management of the future: The road ahead for risk managers

Paul Marchetti

Q1 – Paul, can you please tell the Center for Financial Professionals about yourself and your professional background, and your current focus? Yes, I am a seasoned risk professional with over 25 years of experience in risk management including credit, compliance, BSA, operational risk and market risk. My experience spans across both the public and private sectors where my career started as a bank examiner and in bank liquidation roles. I have since held senior banking positions in; credit, compliance, operational risk roles at both large and community type financial institutions. My most recent roles have been as the CRO & CCO for community banking institutions.

Q2 – You will be presenting within the Future of Risk Management Stream, at the 6th Annual Risk Americas alongside Wells Fargo and Canadian Western Bank. Can you briefly tell the audience how technology and regulatory advances have had an impact on risk managers? Technological advances have occurred across the spectrum of banking products as younger generations want faster results and services. These advances require risk managers to find ways to keep pace by ensuring control environments remain effective and adequate and that data intelligence is timely to identify and mitigate emerging risks. New product approval frameworks and business intelligence efforts are key. Regulators have increased their expectations across all risk disciplines expecting financial institutions to have better and broader skills coupled with increased resources. These expectations are being directed toward inernal resources as well as Board Risk Committees.

Q3 – How should risk professionals prepare for the evolution of risk management as a function?

Risk professionals should be keen to develop a more robust process of risk data analysis to help work through problems and analyze future threats both medium and long term. Develop risk appetite statements and ensure these are aligned with strategic direction and the same are embedded. It is also important to develop a method to measure the risk culture whereby incentives are tied to risk management capabilities to make for a more risk aware culture

Q4- What factors should be highlighted when discussing the future impact on risk managers?

Having exceptional analytical skills is no longer sufficient; these skills should be complimented by highly developed, commercial, strategic, leadership and communication skills to have the ability to drive change.  The CRO must be a true business partner and his/her relationship with the CEO and CFO are critical. The CRO must invoke an environment of healthy creative tensions by participating at core decision making forums and creating value by acting as a true business partner and constructive business challenger. I have found that with significant increases in regulation, a CRO should be driven by business needs and not regulatory requirements; meaning don’t let regulatory aspects overshadow your role’s potential to generate value. I believe that,  to face our forward looking challenges a good CRO must be armed with the following key skills; leadership, influencing, communication and technical.

Q5 – Market conditions will undoubtedly have an impact on the business. How can FIs pre-empt and mitigate these risks before the event?

Market conditions can change having impact on any one of the major risks such as; credit, interest rate, liquidity, compliance or operational. This is where the technical capabilities of a CRO come into play and knowledge and expertise drive the ability to understand how the sphere of market influences can drive the financial intuitions ability to remain safe and sound. A good exmaple of this has been a market driven by decade long historically low interest rates coupled with improving unemployment, decent GDP growth and relatively tamed inflation. Through this environment we have seen a propensity of excessive commercial real estate values coupled with extremely low capitalization rates. Resultant cash flows have been strong and values driven higher. Since commercial real estate assets are a significant portion of risk assets our pre-emptive move was to stress test and sensitize the property cash flows interest rates, respectively, to ascertain the downside risk to capital. This goes beyond setting limits for portfolio concentrations albeit having these bright lines is also a mitigant.

Q6 – How should risk managers utilize the opportunities which technology provides to better manage risks?

CRO’s should ensure that technology is leveraged to provide better data quality and timeliness of data in the flow of work within the risk function and risk committee of the board. More time should be spent analyzing the data and less time spent on compiling the data. Automation should be embedded in every step of the risk governance process. For instance the new Allowance for Loan and Lease Losses (ALLL) FASB requirement, CECL, will require financial institutions to rely on automated processes to calculate the ALLL and to move away from manual processes. Most importantly this will alleviate the human intervention and will allow more time for analysis and indentifying emerging risks. This type of leveraging up technology will allow you to test different models, and make changes in projections, quantitative and qualitative factors including stress testing and then compare the results across the board.

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