Top bank regulator – Risk models key
“Some of our most seasoned supervisors, people with 30 or more years of experience in some cases, tell me that this is the first time they have seen operational risk eclipse credit risk as a safety and soundness challenge,” he said.
While inadequate systems and controls were a primary reason for recent problems in mortgage servicing and foreclosure documentation, Curry said, flawed risk assessment and risk management systems can also create operational risk.
“For community institutions with credit concentrations, a flawed assessment of risk can lead to inadequate controls and insufficient risk management systems,” he said. “For the largest institutions, the challenges here can be exceedingly complex.”
Curry said supervisory guidance on model risk management from a year ago stresses the need for ongoing analysis to make sure models are likely to continue performing as expected. Yet banks and thrifts also face greater constraints on resources and pressure to economize on systems and processes, he said.
“All institutions, regardless of size, must resist the temptation to under-invest in the systems and controls they need to prevent greater risk and larger losses in the future,” he said.
For more information on how financial institutions are diversifying their portfolios through C&I lending, download the whitepaper, Shifting Credit Concentrations: 6 Ways to Prepare.