Community Banks Have Strengthened Risk Management Policies and Systems, According to RMA's Follow-Up Risk Management Study

PHILADELPHIA, January 19—Almost all of America's community bankers have improved their risk management strategies over the last two years, according to a study conducted by RMA, the international association for lending, credit, and risk management professionals.

The most recent study supplements a more extensive study conducted by RMA in 1997 entitled Beating the Odds…A Community Banker's Guide to Risk Management. The objective of the recent study was to track changes over the last two years in order to identify emerging trends in community banks' risk management practices. The original study also provided community bankers with methods for benchmarking practices to identify, assess, monitor, manage, and control their various types of risk.

One notable trend highlighted by the update is that community bankers today have more confidence in their risk rating systems and have increased the number of pass grades they use, from 3.6 to 4.4. In 1997, most community banks tended to rely on relatively few risk ratings.

Bankers rated credit card, first mortgage, and auto products at a higher level of risk in 1997 than in 1999. The same was true of consumer credit overall. Further, they believe that credit card and auto portfolios have a less risky profile than two years ago.

A significant change was found in perceived levels of risk in commercial and industrial (C&I) and commercial real estate (CRE) portfolios. Most respondents believe that C&I and CRE are more risky today than in 1997.

All respondents also are tracking some type of portfolio concentrations, versus 92 percent who did so in 1997. Only 23 percent still do not include a risk/return assessment in their strategies.

According to Allen Sanborn, president of RMA, "Community bankers have been diligent these last two years about improving their risk management strategies, but our findings indicate that some areas still need improvement. Stress testing must become more prevalent, not just in C&I and CRE but in consumer portfolios as well.

"Community banks have the advantage of being members of the communities they serve. By increasing their use of risk management techniques, they will not only be prepared to withstand the next economic downturn but will have a chance to positively affect their community's economic vitality as well."

RMA is the only financial services trade association that specializes in promoting prudent and effective risk management practices across the entire banking and lending spectrum for institutions of all sizes. Its membership consists of more than 3,000 financial service providers. These institutions are represented in the association by more than 18,000 commercial loan and credit personnel in the 50 states, Puerto Rico, Canada, and numerous foreign cities including Hong Kong and Singapore.