Effective risk management starts with being risk-aware

Throughout the September BAI Executive Report: Navigating effective risk management you’ll hear a shared refrain from our experts on prudent risk management: It’s constant, it starts at the top, and its presence is detectable throughout an organization.

In other words, best-in-class banks and credit unions create a culture of risk management.

As Massimo Cutuli, chief risk officer at Optiver, told the audience at a recent event hosted by the Risk Management Association’s (RMA) New York Chapter, “You can easily tell the level of priority the risk culture has [within an institution]. If it’s embedded in the fabric of the front line and second and third lines, management has made it a priority. It comes with the DNA of the firm.”

We introduce you to Massimo in the September BAI Executive Report by way of our lead article, an in-depth look risk concepts set against the backdrop of 2023 failures and interest-rate sensitivity, as well as funding and liquidity concerns. It’s a piece written with a forward gaze to lingering commercial real estate (CRE) volatility and ongoing economic and regulatory uncertainty.

As the article details, only one U.S. bank has failed so far in 2024, yet the experience of 2023 demonstrated that bank collapse is not a thing of the past. And they certainly are not limited to small institutions. The first three banks that failed in 2023 each held more than $100 billion in assets. Those events, and the related regional bank crisis, brought home to today’s generation of bankers the fact that managing risk on both sides of the balance sheet—the liability side (deposits) and the asset side (loans and investments)—is critical.

This thoughtful contribution comes from RMA’s Frank Devlin and Celina Rogers, a pair with a front-row seat to this recent history and access to the knowledge pipeline of RMA members around the country, who regularly put philosophy into practice.

BAI and RMA merged earlier this year. Together, we’re ProSight Financial Association with the common purpose of empowering financial services leaders to strengthen and advance our industry.

We’ll be sharing more about ProSight in the coming months as our organizations integrate, leveraging BAI’s strengths in retail banking and compliance and RMA’s deep expertise in commercial banking and risk management to help you better understand the key issues you’re facing.

There’s more rich content throughout this September issue that already sets us toward that goal.

For our second feature article, we’ve gathered a panel for help navigating the revised Community Reinvestment Act (CRA). Although do keep in mind this overview is intended to be a kickoff to what’s sure to be thorough policy education and enforcement at your bank or credit union.

Most compliance targets for the new-look CRA ramp up in 2026 and 2027, but preparing to comply with this robust legislation will take time and resources. Failure to prepare introduces regulatory risk that could prove costly to the bottom line and to reputation. The CRA isn’t simply a compliance box to check, it should empower bank strategists to respond to the communities in which they serve. As one panelist says in the piece: It’s important to use CRA as a competitive advantage.

The panel is also sensitive to how this new responsibility might chew into already tight budgets, especially as organizations face additional change.

As Melissa Blaser, a partner at Wipfli LLP, says in the article: “We are in a period of regulatory uncertainty, and some institutions are hesitant to invest in the resources. But my advice to them is that you don’t necessarily have to invest more, just capture data differently to be able to comply.”

Certainly there’s another acronym that’s a fixture in risk conversations: CRE.

I talked with Mike Horrocks, a former banker and now consultant with Baker Hill, on his thoughts for the commercial real estate picture as we head into autumn.

Horrocks highlights industry data that expects high vacancy rates in the vulnerable office space to persist through 2026. In fact, it’s that outlook that sparks a different approach to business banking from Horrocks’ view. He urges bolstering relationships and turning up risk sensitivities well in advance of any downturn, sudden or not.

Says Horrocks: “The term ‘intimacy’ might seem out of place in a discussion about real estate risk and the prospect of a lending crisis, but it helps make a point. If your team is willing to build an intimate knowledge of individual clients, you’ll set yourself up for two victories.”

Please jump into his interview for more details on those two potential wins.

And there’s much more on offer in our Executive Report:

• Michael Murphy of ServiceNow tells us in his contribution how proving operational resilience to regulators, customers and other stakeholders has moved up on a list of priorities. And he offers a 5-point playbook to integrate your technology platform to meet those demands.
• Moody’s Carmen Gracia Caceres also has the regulatory climate top of mind but urges financial institutions to perform regular capital stress testing beyond what supervisory rules dictate.
• Cybersecurity risk is the focus of a practical operational checklist offered from Jack Henry’s Eric Gravett, in which he suggests leveraging AI, proactively sharing data and more.
• And for Joel Sequeira of IDology, smart risk management finds a pivotal spot in how banks and credit unions onboard customers. He shares more details on smartly using identity verification to protect the institution and the customer but with limited business interruption.

I know that risk management already informs much of what you already do inside the bank and credit union. But as an industry, we can always reassess, step up our technology and learn how to better map out what may lie ahead. Your customers, your colleagues, your communities rely on these fundamentals.

Check out all this report has to offer and please share it with your network.

Rachel Koning Beals is Senior Editor at BAI.