Financial Research: Building for Growth (Means Getting Risk Right)

MountainTramUnsplash

A bank’s approach to risk management may be impacted by its plans to grow. The Dodd-Frank Act requires publicly traded banks with more than $10 billion in assets to establish a separate risk committee of the board, but Bank Director‘s 2014 Risk Practices Survey, sponsored by FIS, found that more than half of banks with between $1 billion and $5 billion in assets have proactively established a risk committee, despite not being required to do so.

Comparing this to the results of the 2014 Bank M&A Survey may indicate that stepping up the bank’s approach to risk management may be directly tied to strategic growth plans. This survey found that 68 percent of banks with between $1 billion and $5 billion in assets plan to buy a bank this year. These banks also made more acquisitions in 2013, including healthy bank deals, FDIC-assisted transactions and branch purchases.

Getting the ducks in a row on risk management is a crucial step to ensure future regulatory approval for any acquisition that may take the bank north of $10 billion. When I spoke with him last October, Midland States Bank CFO Jeff Ludwig indicated that the bank’s good relationship with its regulators typically resulted in relatively quick and easy approval for deals. This good relationship was founded not only on transparency, but also meeting regulatory expectations.

Midland States has made a significant investment in risk management ‘so the regulators can see that we’re building the infrastructure ahead of our growth.’

The 2014 Risk Practices Survey strongly indicates that a focus on risk management results in better financial performance.  Respondents from banks with a separate board-level risk committee report a higher median return on assets (ROA) and higher median return on equity (ROE) compared to banks that govern risk within a combined audit/risk committee or within the audit committee.

The survey also reveals several best practices for bank boards and management.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s