Pub. 8 2019 Issue 3

9 F A L L | 2019 F E A T U R E In other words, community banks themselves are assessing that risk management/ERM is the “weakest-link” in their bank’s navigation system The following visual summarizes the key drivers of the recently promul- gated Federal Reserve supervisory expectations of Bank Board Effectiveness, and demonstrates that key regulatory bodies will be assessing your bank and its “navigation system” capabilities based on a more integrated view of the three dimensions and four processes. Where is the best place for a community bank to begin in assessing the readi- ness and sufficiency of its overall “navigation system”? In most cases, the best and most efficient place to begin is with the Risk Management process of the bank. Why? First, because each of the three navigating dimensions has a direct role with the bank’s risk management. The management team must execute strong and responsive risk management. The board of directors must provide strong and responsive risk oversight to the bank’s risk management process and decisions. The monitoring disciplines must provide strong and responsive verification of the bank’s adherence to established risk appetites and tolerances. Second, the risk management process has important inter-relationships to each of the other navigational processes, and arguably has the most impact in helping to strengthen the other processes. When operating effectively, Enter- prise Risk Management takes place at a Governance Level (risk management decision-making), a Strategic Level (risk profile and portfolio view of risk), and a Compliance Level (detailed risk assessment and analysis for key risks of the bank). Therefore, it stands to reason that strong risk management processes by the bank will help enhance and optimize board governance, strategic planning, and compliance monitoring. Third, this has become a significant focus of the regulators and examination teams, who are looking for evidence of enhanced and more integrated Enter- prise Risk Management (ERM) disciplines to factor into their bank examination findings and ratings. Lastly, of the four navigational processes, risk management is most identi- fied by banks as a common challenge in terms of finding the balance of what will meet the growing expectations, but still be practical and make sense for the Federal Reserve System: Docket OP-1570 Agency: Board of Governors of the Federal Reserve System Action: Proposed supervisory guidance Supervisory Expectations for Bank Board Effectiveness Mission, Vision & Virtues Stewardship Item (3): Hold senior management accountable Item (2): Actively manage information flow and board discussions Item (5): Maintain a capable board composition and governance structure Item (3): Support the independence and stature of independent risk management/compliance and internal audit Item (1): Set clear, aligned, and consitent direction regarding the firm’s strategy and risk tolerance Risk Appetite & Profile Strategic Direction Control Environment BoardOversightDuties ManagementExecutionDuties MonitoringVerificationDuties Ethical Consistency Risk Tolerance Adherence Strategic Responsibility Control Compliance Mission, Vision & Virtues Operations & Risk Management ► ► ► ► ► ► ► 1 Strategy 2 3 Controls 4 1 2 3 4 1 2 3 4 bank. Many banks are challenged to find an approach to risk management/ ERM that: (1) adds sufficient value to the bank, (2) can be sustained without a “Herculean” effort, and (3) satisfies the regulator’s expectations. An ongoing benchmark study is being conducted by CLA, currently comprised of over eighty community banks, using a diagnostic tool called Risk VitalSigns. This tool measures the achievement level for critical outcomes of a strong risk management discipline, and currently shows an average bench- mark score for community banks of 61/100 where an 80 or better is consid- ered strong and healthy. In other words, community banks themselves are assessing that risk management/ERM is the “weakest-link” in their bank’s navigation system. Strengthening your bank’s risk man- agement/ERM process in practical, tan- gible, and value-producing ways is both possible and achievable for community banks of any size and complexity. The result will be stronger navigation, enhanced performance, and improved outcomes for your bank. Bill Bojan is a firm-wide leader in CLA’s Governance Advisory and Busi- ness Risk Services practices. Over his 30-year career, Bill has been a Chief Risk Officer and Chief Ethics Officer for a Fortune 30 company, and has also advised countless boards and leader- ship teams in leading practices for board governance, risk management, ethics, internal audit, and compliance. Bill resides in Min- neapolis with his wife and two grown children. CLA invites your bank to participate in our ongoing community bank Risk Vital- Signs benchmark group, with the objective of helping your bank, and the community bank- ing industry overall, advance and enhance risk management performance and outcomes. You can contact Bill at 612-397-3271 or Bill. Bojan@claconnect.com to participate in this benchmark group at no cost.