Credit Risk Management
The various processes and functions that support credit risk management are highly interdependent and must operate effectively on both an individual and combined basis. For example, inaccurate or untimely credit risk ratings can render ineffective management reporting, Allowance for Loan and Lease Loss estimates, problem loan management, and portfolio risk monitoring. Similarly, poorly conceived compensation schemes and unspecific or unclear policies or risk tolerances can lead to unwanted and unwarranted risks. As a result, Promontory promotes and takes a holistic approach to credit risk management.
Evaluation of Risk Culture: Institutions often believe that their policies and procedures promote a strong culture of risk management, only to find that those positions are not uniformly followed. Many times, communications, management reporting, and compensation and reward structures are not aligned with desired risk standards.
We assist our clients in evaluating their tone and culture with regard to risk and risk management—identifying stumbling blocks to desired behaviors and performance, and designing remediation steps that may include supportive communication plans, organizational changes and compensation strategies.
Credit Risk Governance: Boards of financial institutions are ultimately responsible for risk management. To be effective and influential, boards must be properly and regularly informed of institutional risks and trends, as well as the efficacy of risk management policies, processes and practices.
Promontory is able to improve clients’ credit risk governance processes by evaluating and benchmarking practices against industry standards and regulatory expectations, and advising and assisting with necessary improvements to existing committee missions, structures, membership, practices, reporting, monitoring, and decision making.
Risk Appetite/Risk Tolerance: Boards and their committees must establish risk appetites and tolerances and set expectations for management in taking and managing credit risk. Simply defined, risk appetite, risk tolerance, and risk limits are the boundaries of risk that the board is willing to accept. Both regulators and industry observers have noted that excessive concentrations and undisciplined credit contributed to the most serious banking problems in recent years.
Promontory evaluates, advises and assists in the development of risk appetites, tolerances, and limit structures. We assist our clients by evaluating and benchmarking their quantitative and qualitative risk appetite and tolerances, as well as their limit structures, relative to sound industry standards and regulatory expectations, while taking into account the clients’ business strategies. Our approach ensures that recommendations are consistent with our clients’ business and financial strategies and risk culture.
Credit Risk Reporting: Credit risk reporting—whether for senior management or the board of directors—is often historical and saturated with large amounts of data but lacks real and actionable information. Risk reporting should be forward-looking and facilitate risk management decisions.
Promontory assists clients in reviewing their current risk reports and in benchmarking against industry practice and regulatory expectations in line with the size and complexity of the respective institution. Working with management, we recommend improvements and develop appropriate reporting templates for effective risk reporting. Where reporting is complicated or inhibited by multiple lending platforms, risk systems, and end-user applications, Promontory can assist by reviewing production and aggregation processes, identifying bottlenecks, and making recommendations to improve data management in order to achieve improved risk reporting.
Policies and Procedures: Policies formally communicate the board’s risk appetites, tolerances and limits to management and personnel, as well as convey other requirements, expectations and guidelines for taking and managing credit risk. When policies do not effectively communicate these expectations, they leave room for misinterpretation and inhibit the ability of independent control functions to evaluate their appropriateness, assess management’s compliance, and detect deviations that could result in unwarranted risk. Procedures must be sufficient to ensure that policies are implemented as intended.
Promontory evaluates lending and credit risk management policies and procedures by benchmarking them against sound industry standards and regulatory expectations. We ensure that our clients’ policies cover all aspects of lending and credit risk management, appropriate to their risk-taking activities, and that procedures are sufficiently detailed and descriptive to be implemented. Promontory also advises and assists in the development and drafting of risk management policies and procedures.
Allowance for Loan and Lease Losses: Regulators and other external constituencies are highly focused on the adequacy of the Allowance for Loan and Lease Losses (ALLL) to appropriately account for losses embedded in bank portfolios. The myriad of diverging opinions between public accountants and bank regulators further complicates the process for bankers.
Promontory assists banks by evaluating ALLL policies, programs, processes, reporting, and methodologies against sound industry standards and regulatory expectations, navigating between accounting and regulatory expectations. Promontory also performs quantitative analyses of allowance adequacy and appropriateness, specifically reviewing the adequacy of specific and unallocated reserves relative to known and expected credit risk levels and trends.
Credit Organization and Structure: A strong credit risk management program must be supported by appropriate organizational structure. Delegations of authority and responsibility; reporting lines; and separation of duties among and between lenders, management and administration need to be defined, with clear accountability, and vital credit risk functions must be sufficiently staffed and organized.
Our professionals evaluate organizational structures, management competency and staffing sufficiency. We advise and assist institutions in designing organizational structures to ensure that they are efficient and clear.
Credit Training: Financial institutions must ensure that each individual—from employee to manager to board member—is familiar with credit policies and procedures, credit processes, and regulatory expectations.
Promontory provides effective risk training in a variety of topics to ensure that policies and procedures are understood and consistently implemented throughout the organization. Training is customized to institutional needs and covers: credit policies and procedures; risk ratings processes, including regulatory ratings; managing regulatory relationships, regulatory expectations and navigating the examination process.
Regulatory Benchmarking and Remediation: Bank regulators and supervisors continue to raise their expectations and tighten their scrutiny of banks. Our team leverages its extensive regulatory experience and relationships to help our clients understand and anticipate regulators’ requirements and develop policies, processes and practices that meet or exceed regulatory requirements. We benchmark institutions’ current credit risk management practices against regulatory guidance and expectations, identifying gaps and assisting in the development of remediation plans, including tasks, responsibilities, timelines, governance and reporting. Importantly, we take into account institutions’ business plans to ensure that their processes and practices will be sufficient for their strategic and tactical business plans and goals.
- For a global bank reengineering its risk management groups, Promontory p erformed a comprehensive review of the firm’s credit risk management function, including benchmarking current practices against industry standards and regulatory expectations. We d eveloped implementation plans and actionable recommendations for improvement to position the firm with a competitive advantage in the current credit environment. Promontory’s work received positive regulatory reviews.
- For a major financial institution converting to a bank holding company, Promontory was e ngaged by the board of directors to analyze current risk management practices relative to regulatory expectations. We r eviewed risk management architecture and resources; assisted in the development of revised credit policies and procedures; and monitored progress on the agreed-upon implementation plan, resulting in positive outcome with regulatory authorities.