The Biggest Risk in Banking

Risk governance is undoubtedly one of the most challenging responsibilities of a bank board of directors. The issues are complex and often highly technical. Most bank directors come from outside the industry and have little experience managing financial assets, which are highly sensitive to changes in the economy.

The risk environment presents a mixed picture. “Where exactly is the economy heading?” says Brandon Koeser, a senior analyst at the consulting firm RSM US LLP, in this edition of The Slant Podcast.

On the one hand, the U.S. economy grew 2.4% in the second quarter of 2023 and inflation has steadily subsided. A year ago, many economists were forecasting a recession by the end of 2023, although Federal Reserve Chair Jerome Powell said recently he does not anticipate an economic downturn by the end of the year.

“Maybe if we do have that downturn, it will be a little further out,” says Koeser.

On the other hand, the Fed has raised the fed funds rate 11 times since March 2022 – most recently in July to a range between 5.25% and 5.5%. That dramatic shift in the Fed’s monetary policy has had a tremendous impact on bank balance sheets throughout the industry, and was a principal factor in the failure earlier this year of Silicon Valley Bank, First Republic Bank and Signature Bank.

Cyber risk, regulation and talent are additional challenges for all banks. But Koeser says the macro-economic environment is still the biggest risk that banks are currently facing. And he suggests that bank boards should take a hard look at how their institutions’ balance sheets will be impacted by sustained higher rates if the Federal Reserve maintains its monetary policy stance for the foreseeable future, and to consider how they should adjust their strategies accordingly.

“I think it’s really an opportunity for the board to engage – re-engage – with management about strategy,” he says.

Risk issues like these will be covered during Bank Director’s Bank Board Training Forum in Nashville Sept. 11-12, 2023. This episode, and all past episodes of The Slant Podcast, are available on BankDirector.com, Spotify and Apple Music.