A Proactive Approach to Risk Adjusted Performance Management

Banks need to assess their lending practices to get a clear view of how the financial climate, and emerging economic uncertainty, will impact their corporate clients and the growth and performance of their business.

To do that, they need to fully understand their exposure to interest-rate and liquidity risk, and proactively manage their balance sheets to maintain growth and enhance profitability. They need to analyze their lending practices, identifying sources of funding and qualifying loan targets to ensure proper loan management. All of this necessarily entails a re-evaluation of their internal systems’ ability to respond to changes that can impact balance-sheet risk and returns. And many banks have concluded that legacy point solutions are not up to demands from the risk and finance departments to model numerous business and risk scenarios.

For these banks, the solution is an overhaul: combining the modeling capabilities of asset and liability management systems with the governance and reach of planning systems and the analytical power of advanced business intelligence tools.

As part of this approach, banks no longer limit asset liability management to regulatory compliance. They are moving beyond compliance, toward creating business value though flexible scenario modeling for a holistic view of the risk factors impacting the future performance of the business.

To benefit from this kind of proactive approach to risk-adjusted profitability management, banks need to implement several key capabilities. These include methodologies and processes for interest-rate management and balance-sheet optimization for fast and efficient advanced scenario modeling. Banks also the analytical power to rapidly evaluate the results and options available to them. Finally, banks need to act on this analysis. This requires them to put in place the information tooling needed to enable frontline staff to execute the selected options, as well as processes and metrics that allow management to assess the impact of any given measure.

As they move toward a holistic risk-adjusted performance management platform, bankers should ask themselves the following questions:

  • What factors are impacting earnings and liquidity within the changing environment?
  • Is the bank incorporating input from market-facing staff related to growth, spreads and potential losses?
  • Is the bank taking a credit hit? If so, how much?
  • Is the bank managing based on its current balance-sheet composition, without considering future events? Is it counting on cash flows that might disappear?
  • Are the bank’s system capable of handling different interest-rate scenarios, including high volatility and negative rates? Can the bank measure the impact of these scenarios on liquidity and earnings?
  • Is the bank’s current asset liability management solution supporting decisions that will maximize stakeholder value?

Any solution should combine three key attributes. First is that it should include an asset/liability management system capable of quickly computing multiple scenarios from the bottom up. Second, the solution needs to include business analytical tools to compare and contrast the rapid reaction plans for prioritization and execution. And finally, it needs a risk-adjusted performance management (RAPM) tool to measure and manage the results.

Attempting to build a solution in-house with this breadth of capabilities can itself be a risky business. Banks often cobble together a fragmented solution, since legacy point systems are typically focused on addressing just one aspect or requirement. This approach lacks a comprehensive or holistic view of the bank’s true risk position. Indeed, manual processes based on spreadsheets of general ledger data may provide a current view of the business, but fail to model for unforeseen risks or changing behaviors. The result can be a disconnect between the bank’s view of the risks it faces and the true factors impacting the bank’s performance going forward.

On top of that, dealing with multiple systems and suppliers introduces its own risk into the situation, including miscommunication, lack of clarity over ownership of key functions and poor interoperability that can potentially disrupt work flows. The bank may need to maintain multiple project teams with various specializations and vendor points of contacts for multiple individual suppliers, introducing complexity and expense.

That’s why banks increasingly are turning toward a more integrated approach combining risk, compliance and analytics to meet the challenge of risk-adjusted performance management. Adopting a consolidated platform can give banks the consistency and agility to gain a true view of their risk situation. The result is a realistic, holistic view of the bank’s business trajectory, accessible and managed through a single point of contact, ensuring consistency of approach and operational efficiency.

Look Before You Leap: A Checklist for Successful Vendor Relationship Management


vendor-management-6-9-15.pngBanks of all sizes increasingly are finding that it can be tough to go it alone. Instead, they are forging relationships and hiring external vendors to manage routine operations. These relationships can deliver substantial expertise and provide efficiency while also creating additional responsibility and risk. To uphold quality customer service, protect an institution’s reputation and maximize satisfaction with a vendor’s performance, banks must thoughtfully establish a framework for overseeing service providers.

Look at the Big Picture
Before addressing the day-to-day management of vendors, banks first should examine their enterprise-wide process for engaging service providers. Large banks often have an entire department committed to this endeavor. Smaller banks, which might lack the resources to dedicate employees to the effort exclusively, should establish a policy to govern their use of vendors. This approach creates a clearly communicated process for all employees to follow, avoids unnecessary duplication of work and keeps critical considerations top-of-mind when new relationships are being solidified.

As part of any vendor management policy, banks should make certain that vendors are:

  • Financially sound
  • Capable of providing services that meet a bank’s specific needs
  • Bound by a contract negotiated with proper protection of the bank
  • Prepared to undergo regular performance reviews

Setting Up Relationships for Success
Vendors are hired to handle a wide variety of responsibilities—from software systems and customer communications oversight to regular account maintenance; however, the best practices for managing vendor relationships typically do not vary. Following are steps to create successful relationships with service providers.

  1. Establish accountability. It is important to assign ownership of each vendor relationship, asking the manager most actively involved with a vendor to oversee its work. Without a primary point of contact accountable for a vendor’s activities, the quality of service could slip and potentially tarnish the bank’s reputation or cause financial harm.
  2. Share objectives from the start. Before beginning to work with a vendor, banks should make their objectives clear. Some of this information is contractual, but what about expectations that are not spelled out in writing? A relationship with a vendor can be defined by levels of service, such as the exact timing of when reports will be received or how quickly emails will be returned. Failure to identify such expectations upfront could result in dissatisfaction with a vendor’s performance as well as wasted time and resources.
  3. Create a performance scorecard. Relationship managers should assess the performance and costs associated with a vendor on a consistent basis. Regularly scheduled conversations or reviews are a good way to keep vendors on track toward meeting objectives. These discussions, which could be held as infrequently as twice a year or as regularly as weekly for critical service providers, are opportunities to talk about concerns and share any changes at the bank that could affect the vendor.
  4. Measure and manage risk on an ongoing basis. Vendors should be monitored regularly to assess their stability. Organizational developments at a service provider, such as a vendor filing for bankruptcy or making major changes to its service offerings, could have substantial consequences for a bank. Banks should work to remain up to date on any information that would necessitate switching to a more reliable provider.
  5. Evaluate alternatives. The best time to consider switching service providers is long before a vendor’s contract matures. If a manager believes a bank could receive better service or could find a more cost-effective vendor, then it is a good idea to explore alternatives early.

Redefined Regulatory Rules
In addition to helping banks better serve customers and operate more efficiently, managing vendors effectively is important for another reason: Bank regulators have increased their focus on vendor oversight and view it as essential to banks’ risk and performance management. Banks that fail to follow through in this area could face heightened regulatory scrutiny or penalties.

Overall, banks likely will find that forging a successful alliance with a vendor is similar to building any other healthy relationship—it will take time and commitment to make the relationship work for the long term. Given recent trends, banks should make sure they—and their customers—are getting the best possible value from their service providers.