My RMA 2018 Summary: “Our Risk Management Is the Best It’s Ever Been”

Five Key Take-Aways from the RMA Conference

Early last week, I attended the Risk Management Association’s annual conference. It was held at the Gaylord Convention Center in National Harbor, just across the Potomac from Old Town Alexandria, a neighborhood I once called home.

I was absolutely blown away by the volume of new construction in the DC area. National Harbor didn’t even exist when I left that area in the late 1990s, and now it’s a bustling destination in and of itself. En route there from National Airport (I mean, Ronald Reagan National), I couldn’t help noticing all of the cranes and gleaming, mixed use developments especially along I-395 in the Southwest Waterfront area which used to house old, tired government office buildings and a waterfront market. I had dinner with an old DC friend who told me Amazon had just committed to bring its headquarters to Crystal City (soon to be named, National Landing), so commercial real estate development is thriving in the DC metro.

The RMA convention attracted risk management professionals from financial institutions small and large, as well as credit unions from California, Texas, Washington state and everywhere in between. My observations from the day:

  • The general consensus on the timing of the next cyclical downturn is…2020.

Eight times. That’s the number of times I heard 2020 mentioned as the year that recessionary conditions will take root…as if it’s a foregone conclusion which of course it’s not, but that was the buzz nonetheless.

“Consensus is building that 2020 will start of downturn so the loans you’re making today are the ones that will be impacted. It’s time to review your credit stress testing and take a good hard look in the mirror. Is it realistic and effective?” Edward Schreiber, RMA chair, Exec VP and CRO Zions Bancorporation

  • “The U.S. banking system is smarter than ever.”

I had the pleasure of shaking hands with Joseph Otting, Comptroller of the Currency after his keynote to thank him for shedding light on the importance of strong risk management at this stage of the cycle. In response to a question about what we’ve done to improve resiliency of banking system since downturn, he replied:

“We have much stronger capital buffers. Our risk management is the best it’s ever been. Risk used to be stuffed in the legal department, and now it’s been elevated to one of the most senior positions at a financial institution. There’s an elevated status to being a risk officer today. Now CEOs are talking about practices that will or won’t fit within their risk parameters.” Joseph Otting, Comptroller of the Currency

Asked what risk professionals today should be focused on, Otting replied without hesitation: “Your people. Make sure you have the talent to go through a market cycle. When things get good, you probably lost the workout people.  So think about whether you have the talent you’ll need to manage through the next downturn. I’d also look at your bank’s customers and ask: where can the quality of our borrowers be upended? And last, make sure you’re communicating to your regulators.”

  • Cybersecurity is top of mind for risk officers: react, resolve, communicate.

Several tracks hit on the threat of cybersecurity, and the inherent challenges of proactively dealing with a moving target that could shut an institution down at a moment’s notice.

“The thing about cybersecurity is that all banks can be vulnerable. The trick is making sure you’re not the slowest one running away from the bear in the woods.” Philippa Girling, Chief Risk Officer, Investors Bank

  • The playing field of lending is shifting.

The conditions that factor into loan underwriting are shifting and banks should be taking notice. Interest rates are increasing for one thing, and until now, the rate hikes haven’t had much impact on the pace commercial real estate deal-making. But they will.

“The Fed will likely raise the fed funds target rate three more times. Higher interest rates will have a negative impact long-term.” Barbara Byrne Denham, Senior Economist, Reis, Inc. Commercial Real Estate Overview

The last downturn was more than ten years ago. Some banks that laid off veterans after the downturn replaced them with younger staff who haven’t seen a market environment like this one. Plus, the market’s been great. The U.S. economy is growing, job growth is up and fundamentals in commercial real estate are still positive so the tendency is to get complacent.

Panelists warned the audience against a “surging risk appetite,” and advised risk managers to put risk controls in place with the expectation of a downturn in 2020:

“You’re all out there throwing money around like a foot fight in a National Lampoon movie. And there’s a theme emerging right now that it’s probably time to baton down the hatches.”

Dev Strischek, Principal, Devon Risk Advisory Group

  • Banks crave efficiency, and technology is the way to get there.

Pressure on risk managers has increased dramatically in recent years, along with the proliferation of data points that banks need to manage on every origination. Two of my colleagues, Jamie Haberlen and Dan Gottlieb, were joined by Emily Nachlas, Director of Enterprise Risk Management at Iberia Bank, on a track devoted to effective third party risk management. The expectations on banks to vet, track and report compliance data on managing their outside vendors will only continue to rise.

“As risk managers, you need a methodical process for your due diligence because regulators will want to come and see your vendors.  You need to be very organized and score the risk of your third-party vendors.  Regulators are looking to make sure you have a documented policy and ongoing due diligence and monitoring.  Check all the boxes, and make sure you have a clear onboarding – and offboarding – process.”

Emily Nachlas, Executive VP, Director of Enterprise Risk Management, IBERIABANK

And the dramatic increase in reporting obligations for third-party vendors ramps up the need for efficiency considerably:

“There’s a strong desire by banks to streamline. I was talking to a Chief Appraiser at a bank, and he told me he doesn’t want his team to re-underwrite every appraisal but rather, he wants to train his team to know which appraisals to focus on.   If you can capture appraisal data in a structured format, then it becomes a software process of identifying properties that may, for instance, have a cap rate that falls outside a set range of benchmarks for similar properties. There’s a common set of data fields that can be enunciated to allow data to be structured in a common, useful way and a number of market participants are already starting to come together to do just that.”

Dan Gottlieb, Chief Strategic Officer, EDR

 

 

 

 

  • Listen to the Cassandras.

Last, any historians reading this would’ve loved the keynote by Richard Clarke, cybersecurity White House advisor, speaking on his book Warnings: Finding Cassandras to Stop Catastrophes, which focused on history’s tendency to ignore the “Cassandras” who had warned about impending disasters. Of all of the current risks he’s watching, sea level rise is the one that gives him the most pause—that we could be facing a far worse rise than the models are predicting. He implored the hundreds of risk managers in the room:

“Have a group that’s open minded enough to explore the warnings of Cassandras. Resist the urge to discard warnings because they’re inconvenient or we’d rather not think about things that seem outlandish or complex. Take them seriously enough to test data even when all the other experts disagree. Check the risk. That’s our job.”