RMA Conference Explores Enterprise-Wide Risk Management
WASHINGTON, DC, March 13 - Most bankers today are confident about their ability to handle credit risk, but as the industry moves toward risk management on an enterprise-wide basis, the level of confidence drops. That was the message today from Allen Sanborn, president and CEO of RMA, the international association of lending, credit and risk management professionals, at the opening of RMA's 4th annual risk management conference: Capital Management: The Next Challenge.
"Over the last decade, the financial services industry has made great advances in developing effective risk management practices so that institutions today have considerable options, and portfolio management tools, to more effectively measure and price credit risk," said Sanborn. "However, the next challenge will be capital management, assigning capital on an enterprise-wide, risk-adjusted basis."
Sanborn observed that regulators also are moving in that direction, referring to this past June when the Basel Committee on Banking Supervision issued a proposal for a new capital adequacy framework to replace the existing Risk-Based Capital Accord issued in 1988.
"Reform of the Basel Accord could very well become the most important issue facing the industry this decade," said Sanborn. "We at RMA have long argued that regulatory capital requirements should be more directly tied to risk, both on and off the balance sheet.
"Despite the efforts of the original Accord to produce a common international regulatory capital framework to help strengthen the soundness and stability of the banking system, it did not necessarily promote prudent risk management practices within financial institutions. Rather, it may have provided an incentive for greater risk-taking since it makes higher risk activities appear more profitable than lower risk ones on a regulatory capital-adjusted basis.
"In January, the Basel Committee released a discussion paper entitled Range of Practices in Banks' Internal Ratings Systems," he noted. "Included in its four key policy objectives was a strongly held RMA opinion that Accord reform must provide 'incentives for banks to continue to refine risk measurement processes.'
"This is not a big/small bank issue. Although large, complex banks will be the first to be subject to new capital guidelines, all banks will eventually fall under new capital rules. Further, tying risk to capital levels will have a significant impact on all financial service providers, to the long-term benefit of everyone. Reform will be an ongoing process, not likely to be in full effect until 2002 or after, which is more than enough reason to focus our efforts on it immediately."
The two-day conference continues through Tuesday, March 14, and features speeches and panel discussions from bankers from such leading institutions as Bank of America, Royal Bank of Canada, Citibank, Bank of Montreal, FleetBoston and PNC. Also presenting are representatives of the Federal Reserve System, the Office of the Comptroller of the Currency, Standard & Poor's and the Wharton School.
RMA has conducted groundbreaking research on advanced risk management techniques. Winning the Credit Cycle Game (large banks) and Beating the Odds (community banks) both provide cutting-edge analysis of best practice procedures for management of credit risk in the commercial loan portfolio. RMA also recently released two additional studies designed to help financial institutions integrate risk management practices throughout the bank and develop enterprise-wide risk measurement and control.
RMA is the only financial services trade association that specializes in promoting prudent and effective credit 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 50 states, Puerto Rico, Canada and numerous foreign cities, including Hong Kong, Singapore and London.
For more information, call Pam Martin, Director of Regulatory Relations and Communications, at 215-446-4092 or e-mail mailto:pmartin@rmahq.org