In this age of enterprise risk management, a new product or process risk assessment is mandatory. A good risk assessment looks at any new effort from a variety of angles and tries to quantify the unmitigated risk. While a risk assessment is an important step in protecting current operations, it is also the place to understand the opportunity cost of not offering the product and the potential revenue that the new effort or procedure will bring to the Bank.
The goal of the risk assessment is to explain the new endeavor, highlight the risk, explain who or what might be at risk, describe the mitigation and then be clear on the residual or unmitigated risk. Here “risk” should be defined as the failure to accomplish the stated objectives. This is an important distinction as there may never be any financial loss of a new product, but if the new product doesn’t sell, then it is a failure in accomplishes the stated objectives. For any loss, potential loss, unplanned expenditure or unmet objective, the risk assessment should be updated to make sure it grows with the product or new process.
The detail and analysis of the risk assessment should be commensurate with risk. For most new products a simple five to seven page analysis will be enough. There is no need to overcomplicate the process. In many banks, the risks of a new offering are well known and the necessary control measures are already in place. For example, offering a new interest bearing business checking account usually doesn’t require too much analysis.
The basic bank risk assessment is a mix of both qualitative review and quantification. Usually, the analysis starts with the categorization and ranking of risk. Management should ensure that the risks are adequately reflected so that a bias does not creep in. A quantification usually takes the form of financial modeling of the new product, service or cost savings associated with a new process. However, quantification can also be as complicated as a bank might want depending on the risk involved and could include benchmarking, simulations and third party validation.
We just rolled out our ARC Program that allows community banks to hedge fixed rate loans and receive floating. Since this program doesn’t require any hedge accounting or management, it is a fairly straight forward process for the community bank and thus lends itself to an easy to understand template. A Word version of this template can be found here . Regardless of if you are interested in the Program or not, the template may help get your started.
In addition, in our Resource Center, you will find one of the better guides we have found to help understand more complicated risk assessments. This guide can be found here .
Submitted by Chris Nichols on February 24, 2014