2020 Risk Survey Results: “Don’t Panic. Just Fly the Airplane.”

It wasn’t uncommon in the latter half of 2019 for bank executives to note the margin pressure faced by the industry, brought on by an inhospitable interest rate environment. And rates dropped even lower in early 2020, with the Federal Reserve cutting rates to zero.

“In spite of the Fed’s yo-yo interest rate, we have a responsibility to manage our assets in a manner that is in the best interest[s] of our shareholders and communities we serve. The key is not to panic, but [to] hold the course,” said John Allison, CEO of Conway, Arkansas-based Home Bancshares, in the $15 billion bank’s second quarter 2019 earnings call. “At the end of the day, your management’s trying to operate profitably in the middle of this chaos. They say when you’re piloting an airplane and there’s a major problem, like an engine going out: ‘Don’t panic. Just fly the airplane.’”

Allison’s advice to “just fly the airplane” seems an appropriate way to frame the risks facing the banking industry, which Bank Director explored again in its 2020 Risk Survey, sponsored by Moss Adams. Conducted in January, it includes the views of more than 200 independent directors, CEOs, risk officers and other senior executives of U.S. banks below $50 billion in assets.

A majority of these industry leaders say they’re more worried about interest rate risk amid a competitive environment for deposit growth – 25% report their bank lost deposit share in 2019, and 34% report gains in this area. Looking ahead to 2020, most (73%) say their bank will leverage personal relationships to attract deposits from other institutions. Less than half will leverage digital channels, a strategy that skews toward – but is not exclusive to – larger banks.

In the survey, almost 60% cite increased concerns around credit risk, consistent with the Federal Reserve’s Senior Loan Officer Opinion Survey from January, which reports dampened demand for commercial loans and expectations that credit quality will moderately deteriorate.

Interestingly, Bank Director’s 2020 Risk Survey finds respondents almost unanimously reporting that their bank’s loan standards have remained consistent over the past year. However, the majority (67%) also believe that competing banks and credit unions have eased their underwriting standards over the same time period.

Key Findings

• Scaling Back on Stress Tests. The Economic Growth, Regulatory Relief and Consumer Protection Act, passed in May 2018, freed banks between $10 billion and $50 billion in assets from the Dodd-Frank Act (DFAST) stress test requirements. While last year’s survey found that 60% of respondents at these banks planned to keep their stress test practices in place, participants this year reveal they have scaled back (7%) or modified (67%) these procedures.
• Ready for CECL. More than half of survey respondents say their bank is prepared to comply with the current expected credit loss (CECL) standards; 43% indicate they will be prepared when the standards take effect for their institution.
• Cyber Anxiety Rising. Eighty-seven percent of respondents say their concerns about cybersecurity threats have risen over the past year. This is the top risk facing the banking industry, according to executives and directors. Further, 77% say their bank has significantly increased its oversight of cybersecurity and data privacy.
• Board Oversight. Most boards review cybersecurity regularly – either quarterly (46%) or at every board meeting (24%). How the board handles cybersecurity governance varies: 28% handle it within a technology committee, 26% within the risk committee and 19% as a full board. Just one-third have a director with cybersecurity expertise.
• Climate Change Overlooked. Despite rising attention from regulators, proxy advisors and shareholders, just 11% say their bank’s board discusses climate change at least annually as part of its analysis and understanding of the risks facing the organization. Just 9% say an executive reports to the board annually about the risks and opportunities presented by climate change. More than 20% of respondents say their bank has been impacted by a natural disaster in the past two years.

To view the full results of the survey, click here.