Productivity. Profitability. Peace of Mind.

Bank Management Must Properly Assess Risks

By Mark Nowak

Let’s start out with a statement that should be obvious — asset quality is related to the left hand side of the bank’s balance sheet. Bank management is concerned with the quality of their loan portfolio since for most banks their loan portfolio provides the major earnings stream for the bank. And, not protecting that earnings stream can negatively impact the right hand side of their balance sheet, namely capital.

Most bankers and examiners will agree that the single greatest risk to a bank is the risk of loan losses. As noted above, since loans provide the major earnings stream for most banks; their loan portfolios typically represent a majority of their assets and thus the greatest area of risk. It’s not hard to imagine an entire year’s worth of earnings (or more) being completely eliminated because of only a few large loans being charged off. In fact, that very scenario has played out numerous times over the past couple of years as noted by the number of bank closings.

Because an individual bank’s exposure can be so vast, it is inherent they spend a significant amount of time and resources assessing their risk. Bank management must have the ability to recognize and control loan portfolio risk, as well as potential risk. Assessing risk involves much more than simply calculating past due and non-accrual ratios, talking about concentration ratios, or noting the amount of the bank’s owned real estate.

To properly assess their risk, a bank should basically focus on the following areas:

  • Implement effective policies before loans are made,
  • Enforce their policies as the loans are made,
  • Continually monitor the loan portfolio after the loans are made; and
  • Ensure an adequate loan loss reserve is maintained.

By focusing on these items, a bank sends a clear message about just how serious it is about its’ tolerance for risk and — equally as important — protecting its’ earnings stream.

Oak Hill Business Partners is a professional services firm serving small and mid-sized business with world-class financial, business, growth development, and operational solutions.  We will work with you and your team to develop and execute an overall systematic approach to drive out non-value added costs.  Whether it is working with a banker to get funding or helping your business to have the right financial processes, we have the expertise to support you so you can focus more effort on your core expertise.   For more information, Contact Us today.

Mark Nowak is a Partner with Oak Hill Business Partners, specializing in bringing financial and strategic leadership to banks and other businesses along with analytical and problem-solving methods.  With his help, organizations have achieved significant cost reductions and revenue enhancements.

 

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