I’m in Chicago at Bank Director’s annual Bank Audit & Risk Committees Conference along with more than 260 bankers and some 315 total attendees. At a time when audit and risk committees have an increasing amount of responsibilities, I’m impressed with the commitments made by attendees and speakers alike to tackle real issues as opposed to sugar coating the challenges before banks today.
As we move into a series of afternoon breakout sessions, I am taking a pause to share my observations on the day so far. Having moderated a session that touched on how banks can enhance risk oversight capabilities and effectively challenge management on risk, let me try to make sense of the issues being faced by senior bankers and board members if you are not with us.
Step 1: Know Where We Are Coming From
Now that the worst of the financial crisis is behind them, you might think bank boards might finally breathe a sigh of relief. You would be mistaken. For example, we have been in an exceptionally low-interest rate environment — one that has caused net interest margins to decline significantly since 2000. Moreover, growing the bank organically remains challenging with slow loan growth and changing consumer expectations. Finally, compliance costs and uncertainties continue to escalate. So yes, for banks here with us in Chicago, the storm was weathered. Still, significant risks and challenges remain in place.
Step 2: Accept Where We Are Today
Per our first speaker, Steve Hovde, it has become exceedingly more difficult to maintain net interest margins without growing loan balances. As he made clear, banks with lower loan-to-deposit ratios operate with less overhead, but they have been unable to translate their lower operating costs into higher profitability over the long run. In his words, loan growth is now paramount to profitability — and banks will need to find ways to generate loans either organically or (more likely) through M&A activity.
I know that many banks are struggling to find new revenue sources. I also hear how bank boards are considering diversifying into new loan products and service offerings to attract and retain new and existing customers. So, for banks considering new lending strategies or launching a new product or service, I made note that the audit committee, risk committee and internal auditor must collaborate to safeguard the organization by understanding an organization’s initiatives, limits and controls, all while understanding the risk monitoring that exists at the institution.
Step 3: Understand Where Things Are Heading
As we look ahead, it is quite clear that the largest banks in the U.S. (e.g. those above $50Bn in assets) have greatly benefited from their ability to spread fixed costs over a larger pool of earning assets. They have lower efficiency ratios, more non-interest income and stronger earnings. Since there are at most 30 banks that are above that $50Bn threshold out of some 6,500 banks, the risks facing most of the industry may take various forms but share similar origins. That is, banks — and their boards — will continue to wrestle with technology issues, find fewer opportunities to replace declining fee revenue, deal with non-regulated “shadow” banks, struggle with regulatory cost burdens and expectations, face new cyber threats and have to address third-party vendor risks.
Tomorrow, I will have more to share on this afternoon’s breakout sessions and our final point/counterpoint session. In between, I invite you to follow the conversation via Twitter using #BDAudit15, @bankdirector and/or @aldominck.