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How to Fix Potholes in Banking

Mar 19, 2014 1:02:00 PM |

Rusty Butcher

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CarPotholes_HORNEI was recently heading home on I-40 from Nashville and couldn’t believe all the potholes. The cold winter in middle and west Tennessee has wreaked havoc on the roads, and I found myself continuously dodging potholes so I could have a smooth, comfortable ride home. 

About 50 miles from my exit, traffic came to a screeching halt. After sitting in what had become a huge parking lot for about 10 minutes, traffic began to move very slowly for the next few miles. I was anxious to get home and was seriously annoyed. 

When I finally got close enough to see what caused the delay, I realized it was a road crew working on the potholes. I immediately thought, Why can’t they do this at night when nobody is on the roads? That’s when it hit me – I didn’t want the potholes on the road, but I selfishly didn’t want them fixed at a time that might inconvenience me.

In banking, there are a lot of potholes out there – issues and weakness we know need to be addressed. But we oftentimes don’t want to deal with the inconvenience associated with fixing them. An annual risk assessment as part of the overall audit plan is the ideal time to look at your potholes and consider necessary actions. But do you view the risk assessment as an opportunity to identify and prioritize fixing your potholes, or do you consider it an inconvenience?

A thorough and well-executed risk assessment with the input and opinions of senior executives, business heads and internal audit personnel will assist in developing a roadmap (pun intended) for prioritizing efforts. You should consider the following in your risk assessment process.

  • Credit Risk – What is the risk to earnings and capital if borrowers fail to perform?
  • Interest Rate/Market Risk – How might adverse movements in interest rates, market rates, or prices impact earnings and capital?
  • Liquidity Risk – Is there potential that your bank could be unable to meet obligations due to inability to liquidate assets or obtain funding?
  • Operational Risk – What is the likelihood that inadequate information systems, operational problems, control breaches, or fraud will result in unexpected losses and impact earnings and capital?
  • Legal/Compliance Risk – Are there unenforceable contracts, lawsuits, or adverse judgments that might negatively affect your operations? What is the risk to earnings or capital arising from violations or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards?
  • Strategic Risk – Have you fully considered the risks associated with management’s strategic direction, business decisions or implementation of those decisions?
  • Reputation Risk – Is there potential that negative publicity will impact the institution and cause a decline in the customer base, prompt litigation, or create revenue reductions?
  • Fraud Risk – Are you susceptible to risk arising from a person intentionally using deception to cause the institution to suffer loss?

There are many potholes in banking. Are you ready to deal with the inconvenience of repairing the road, or will you put your institution at greater risk by continuing to swerve and dodge the potholes?

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THIS POST WAS WRITTEN BY Rusty Butcher

Rusty is a partner and the firmwide director of HORNE's financial institution services. He currently provides audit and internal control consulting services to financial institutions and other publicly traded companies. Rusty also serves as chairman of HORNE's technology committee, and is a member of HORNE's board of directors.

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