How ERM Can Help Your Institution Avoid Flying Blind

Three of the four largest bank failures in U.S. history have occurred in the past 60 days. While Silicon Valley Bank, Signature Bank, and First Republic Bank had different reasons and conditions for failing, they all share one lesson: leaders of financial institutions and their Boards must reconsider centuriesold risks under the terms of today’s marketplace. How can depositories manage social media and public relations to ensure their depositors’ perceptions match the institution’s balance sheet strength? How should leaders rethink deposit outflow friction during a run in an online and mobile banking environment? How can financial institutions manage deposit growth to ensure size doesn’t threaten scale?

Most importantly, for Boards, do you know what risks your management team is taking? Is the institution appropriately compensated for those risks? How are those risks similar or dissimilar to the industry? Thankfully we can draw on rich examples of heroic acts; situations where navigating uncertainty went far beyond the balance sheet and boardroom.

Learning From Aviation

On September 17, 1950, Navy Ensign Edward Jackson, a 25-year-old flight leader for a flight of F9F-2 Panthers during the Korean War, landed his damaged jet on the USS Philippine Sea while flying temporarily blinded. He did this after colliding with a heavy cable wire strung up as an “aerial booby trap” across the Han River. The cable shredded his starboard wingtip tank, spilling fuel rapidly. When the cable snapped from the speed of his plane breaking through it, it snapped across his canopy, destroying his windscreen and side panels. It sent shards of plexiglass at his face; his goggles were instantly dislodged, while the glass shrapnel from his canopy cut into his nose and eyebrows. To make matters worse, he was knocked unconscious by the blast of the shattering canopy and the force of the wind coming at him through the hole in his windscreen. 1

He was saved by his wingman, Ensign Dayl Crow, waking him up and calmly guiding him by radio to a successful landing on what amounted to a postage-stamp-size target in the middle of the ocean. Jackson’s instincts and knowledge of the plane also came into play. He listened carefully to the landing instructions, making all of the corrections the flight deck officer commanded. Miraculously Jackson suffered no permanent damage to his eyes and was back to flying his F9F-2 Panther within a couple of weeks. 1

Thankfully, pilots now operate with various redundancies ranging from Instrument Landing Systems (ILS), GPS, and other navigation aids developed over decades of prudent review and improvement. In many cases, advanced control dashboards and communications provide enough accuracy to allow autopilot and autothrottle systems to land an aircraft safely.

The Value of an ERM Dashboard

Everyone can agree that the dangers of flying an aircraft far outweigh the physical harm posed by managing financial institutions; however, it’s important to pay attention to the lessons learned and improvements made in navigation. Leaders within financial institutions are tasked with navigating a diverse set of risks through an ever-changing environment. How can leaders ensure they know and understand the universe of risks being taken? How should they be monitoring and assessing those risks across the organization?

Depository leaders should never feel like they are flying blind. Financial institutions have a duty to deploy a reliable enterprise risk management “ERM” dashboard to monitor conditions safely and soundly. If you don’t think there’s uncertainty ahead, consider how many different answers the following questions might generate within your organization and across peers.

▪ Are our products and services evolving to meet changing market demands? Do we need to take advantage of opportunities to retain existing relationships and attract new ones?  

▪ Can our operations keep up with faster-moving payment expectations?

▪ Can our IT security team identify and patch vulnerabilities in a timely manner?

▪ Does the organization have the internal and external data required to make informed and timely decisions?

▪ Are our systems and applications keeping up with compliance requirements? ▪ Can our deposit base sustain a full rate cycle?

▪ Does our loan growth appropriately account for collateral value cycles and margins to ensure scalable growth with an appropriate credit structure?

▪ Does our technology plan include a long-term vision to create efficiencies around key systems (e.g., core/LOS/CRM)?

▪ Do we effectively develop internal talent to meet succession planning and growth goals?

Building an Effective ERM Framework

It’s important to emphasize that the ERM dashboard is not the first step, but in fact the final step in an effective ERM framework. The primary concern is to identify where the organization’s risks arise. Financial professionals know credit risk appears the moment an institution makes its first loan; liquidity risk begins when the first deposit is taken; market risk arises from pricing both loan and deposit products; operational risk comes with the very first transaction. All depository risks derive in some form or fashion from the products and services financial institutions offer, and yet many organizations’ risk appetite statements and risk assessments are silent when it comes to those very same products and services. After reviewing over 100 risk appetite statements from depositories ranging in assets from $1B to $80B, it is clear that the industry is great at defining risk taxonomies and including indicators (mostly lagging) such as past due and charge-off activity, loss data, etc. Are leaders doing enough to communicate and highlight where those risks originate before they materialize? Are financial professionals highlighting new opportunities to take on risk within their institution’s risk appetite?

Preparing for Tomorrow’s Risks Today

As the industry moves forward, senior leaders can leverage recent events to help Board Directors understand the risks their organizations are taking. By improving transparency and communicating expectations of a shared risk-taking vision, financial institutions can better create and preserve value for key stakeholders while preparing the organization for expected and unexpected events. Several key steps leaders should take include:

▪ Develop a products and services assessment to identify the consequential risk factors contributing to the inherent risk of your business across your defined risk taxonomy.

▪ Define the products and services allowed and disallowed in your risk appetite statement. Leave room for flexibility but design the document to force escalation and discussion for any material deviation.

▪ Establish an explicit, forward-looking view of a desired risk profile through an economic cycle and set qualitative and quantitative limits for achieving the stated risk profile. 

▪ Define ranges for risk metrics aligning with your desired risk profile levels.

▪ Set expectations for business line strategy reviews and facilitate regular discussions about managing unexpected economic or market events in particular geographies or products. Incorporate your risk appetite review in your strategy sessions.

Regardless of asset size, forward-thinking institutions should consider the importance of ERM in the daily management of financial intermediaries. We encourage you to take steps now to identify and assess the risks inherent in your business, develop an effective risk appetite statement, and customize an ERM dashboard, to help your institution better navigate the uncertainty that lies ahead.

Contact us at to discuss more best practices in risk management.

ALM First” is a brand name for a financial services business conducted by ALM First Group, LLC (“ALM First”) through its wholly owned subsidiaries: ALM First Financial Advisors, LLC (“ALM First Financial Advisors”); ALM First Advisors, LLC (“ALM First Advisors”); and ALM First Analytics, LLC (“ALM First Analytics”). Investment advisory services are offered through ALM First Financial Advisors, an SEC registered investment adviser. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors’ Brochure. The content in this message is provided for informational purposes and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

The content in this article is provided for informational purposes and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. While such information is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. Statements herein that reflect projections or expectations of future financial or economic performance are forward-looking statements. Such “forward-looking” statements are based on various assumptions, which assumptions may not prove to be correct. Accordingly, there can be no assurance that such assumptions and statements will accurately predict future events or actual performance. No representation or warranty can be given that the estimates, opinions or assumptions made herein will prove to be accurate. Actual results for any period may or may not approximate such forward-looking statements. No representations or warranties whatsoever are made by ALM First Financial Advisors as to the future profitability of investments recommended by ALM First Financial Advisors.

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