The RMA Journal - February 2021 - Citizens Trust Bank

CROS DISCUSS COVID-19, CYBERSECURITY AT RMA NEW YORK CHAPTER EVENT p. 12

THE FUTURE OF

BANKINGp. 16

February 2021 | rmahq.org

An RMA Publication

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February 2021 The RMA Journal 1

FEBRUARY 2021volume 103 /

Contents

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CYBERSECURITY/FRAUD12 Keep Your Risk Management

Guard Up as the Pandemic (Hopefully) Winds Down At a recent round table discussion of the New York Chapter of RMA, chief risk officers discussed the impact of working from home on culture, cybersecurity, and fraud during the COVID crisis.

EMERGING RISKS/GEOPOLITICAL RISK/CLIMATE RISK

Banking and the Future of Everything: Author, Educator, and Trend Spotter Mauro Guillen on the Tipping Points That Will Define the Next Decade and BeyondIn a recent interview with The RMA Journal,Mauro Guillen discusses his book, 2030: How Today’s Biggest Trends Will Collide and Reshape the Future of Everything,and the ways the enormous geopolitical, demographic, and climate-related changes we are about to experience will affect the banking industry.

SPOTLIGHT ON PUBLISHING

Managing the Speed and Constancy of ChangeDean A. Yoost, the author of three previous RMA books that provide wisdom not only for boards but for practitioners throughout your institution, has authored a fourth RMA book, Board Oversight of the Constancy and Speed of Change. The volume provides wisdom on how to transform and adapt to change, an organizational value that needs to be clearly defined, measured, and above all treasured.

16 24

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The RMA Journal February 2021 2

The RMA Journal (ISSN 1531-0558) is published monthly (except August and January) by The Risk Management Association, 1801 Market Street, Suite 300, Philadelphia, PA, 19103, 215-446-4000. Periodicals postage is paid at Philadelphia, PA, and at additional mailing offices. Postmaster: Send address changes to The Risk Management Association, 1801 Market Street, Suite 300, Philadelphia, PA, 19103. Copyright 2021 by RMA. The Risk Management Association (“RMA”). All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without the prior written permission of RMA. This publication is designed to provide accurate and authoritative information concerning the subject matter covered, but is not to be construed as rendering legal, accounting, or other professional advice.

FEBRUARY 2021

CREDIT RISK/MODEL RISK MANAGEMENT42 The Importance of Quantitative Analysis and

Granularity in Risk Rating Systems: A SeriesThrough a series of articles, The RMA Journal will highlight the importance and capabilities of risk rating systems through interviews with practitioners, case studies from financial institutions, and a look at RMA’s Dual Risk Ratings solution. WILL KUTTEH

REGULATORY ISSUES/CREDIT RISK68 Community Banks and the Paycheck Protection Program

The RMA Journal recently interviewed members of RMA’s Community Bank Council about their experiences with PPP. They looked back and forward, sharing what it was like to be part of PPP and how they might be able to leverage the mammoth stimulus program for new opportunities and lasting success.

MODEL RISK MANAGEMENT 72 Model Performance Monitoring Adjustments: A

Framework to Respond to COVID-19If the 2007-09 financial crisis raised the awareness of complexity when modeling probability of default, the COVID-19 epidemic has led to increased suspicion of the accuracy of econometric models’ estimates and the reliability of those models among financial institutions. Before outcomes data becomes available and enables model redevelopment, performance monitoring can be leveraged to evaluate overlay and adjustment necessity following the framework proposed in this article.LIMING BROTCKE

DEPARTMENTSIN EVERY ISSUE

3 From Your RMA Leadership

4 RMA Calendar of Events

5 RMA New Member Welcome

6 The Legal Corner

8 Rules and Rulings: Regulation,Legislation, and the Courts

THIRD-PARTY RISK MANAGEMENT78 RMA White Paper Shares Third-Party Risk Management Lessons Learned During COVID-19

A new RMA white paper, “SARS-COV-2: Recommendations for Third Parties Working from Home & Returning to Facilities,” shares valuable lessons learned by practitioners navigating COVID-19’s impact on the crucial relationship between financial institutions and their third parties.

FEATURES

48 RMA Annual Report

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DEPARTMENTS

FROM YOUR RMA LEADERSHIP

ONE YEAR IN, A BRIGHTER FUTURE BECKONS

It was about this time a year ago when we began to un-derstand our lives were headed for upheaval.

On January 6, 2020, the World Health Organization had reported a novel coronavirus was the cause of the frightening and fatal outbreak in Wuhan, China.

As the month progressed, country after country, includ-ing the U.S., announced their own cases. RMA prioritized health and safety from the start. We engaged an expert in crisis management and business resiliency to advise us and our members on responding to a pandemic. We postponed courses and events. Ultimately, we sent our employees home equipped with laptops to keep them from harm’s way.

And throughout what has now been nearly a year-long crisis, we have continued to innovate and identify op-portunities to help members when we are needed most.

Importantly, we accelerated the delivery of thought lead-ership into online delivery as the industry moved to work-from-home environments. Our series of weekly video peer sharing calls (more than 180 in total)—segmented by bank type and bank role—allowed almost 6,500 members to navigate the issues that were most relevant to them, from branch closures, to PPP, to cybersecurity. RMA also pro-duced 40 complimentary-to-members webinars that ad-dressed risks that were created or heightened by COVID.

We also transformed our Annual Risk Management Conference, our Governance, Compliance, and Op-erational Risk (GCOR) Conference, and our Securi-ties Finance and Collateral Management Summit into virtual events. Our round tables also went virtual, and we launched a suite of online instructor-led and self-directed courses. In total, 3,719 registered for RMA’s virtual conferences, round tables, summits, forums, and courses in 2020.

Through it all, we learned the importance of adapting

“Throughout what has now been nearly a year-long crisis, we have continued to innovate and identify opportunities to help members when we are needed most.”

quickly to changed environments and circumstances—no matter what it takes. It is not an overstatement to say there is simply no other way to survive. We also marveled at the growing power of technology in the workspace. It continues to keep us productive and connected after months in a remote environment.

But we also appreciated, again and again, that what really makes RMA thrive is people. Online or in-person, RMA is powered by a community of dedicated practi-tioners who share their knowledge and support to make institutions and the industry stronger.

Meeting the needs of RMA members over the past 12 months or so has been gratifying. It has been more gratifying still to read all the positive comments and reviews—and to know we made a difference with our virtual offerings. Members are not only finding them valuable and enlightening, but also convenient and cost-effective. Having benefited from them, many plan to make RMA’s virtual round tables, courses, and conferences part of their professional development and intelligence-gathering even after live events return.

When will that be? As I write this, it is still impossible to say, but the optimism regarding the power of vaccines to put an end to this crisis is growing daily. Suffice it to say, the sooner the better. In the meantime, let’s all stay safe and get ready for the brighter days ahead.

Nancy J. Foster | RMA President and [email protected]

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mailto:[email protected]


CALENDAR OF EVENTS

Analyzing Personal Financial Statements and Tax Returns – Virtual Course

F̈ebruary 22, 24, & 26, 202110:00 A.M. – 12:30 P.M. Eastern

Commercial Real Estate Lending III: Global Cash Flow – Virtual Course

F̈ebruary 22, 24, & 26, 20219:00 A.M. – 11:30 A.M. Eastern

FOR MORE INFORMATION VISIT RMAHQ.ORG

LETTERS TO THE EDITOR

INTERACT WITH US: The RMA Journal welcomes letters from our readers. Letters can be e-mailed to Frank Devlin, Senior Editor, [email protected]. We look forward to hearing from you!

FEBRUARY 2021ISSUE OF

THE RMA JOURNAL

FOLLOW THE RMA JOURNAL...

@thermajournal

RMA SERVICESFor a complete listing of

educational opportunities, visit the RMA website, www.rmahq.org.

Structuring Commercial Loans I – Virtual Course

F̈ebruary 1, 3, & 5, 20211:00 P.M. – 3:00 P.M. Eastern

Commercial Real Estate Lending II: Underwriting – Virtual Course

F̈ebruary 1, 3, & 5, 2021 10:00 A.M. – 12:00 P.M. Eastern

Lending to Non-Profit Organizations – Virtual Course


Optimizing Your Institution’s Industry Research & Benchmarking Process – Risk Readiness Webinar Presented by eStatement Studies

F̈ebruary 5, 20212:00 P.M. – 3:00 P.M. Eastern

Lending to Medical and Dental Practices – Virtual Course


FEBRUARY 2021

Relationship Management Skills for Commercial Lenders – Virtual Course

F̈ebruary 8, 10, & 12, 20219:00 A.M. – 11:00 A.M. Eastern

Understanding and Interpreting Real Estate Appraisals – Virtual Course


Detecting Problem Loans – Virtual Course


Analyzing Business Tax Returns – Virtual Course


Ransomware: Cyber and Regulatory Concerns – Risk Readiness Briefing Webinar


Best Practices in Asset/Liability Management: A Focus on Liquidity & Market Risk – Virtual Course


Cash Flow Analysis II: Applied Concepts – Virtual Course

F̈ebruary 16, 17, 19, 22, 24, & 26, 20212:00 P.M. – 4:00 P.M. Eastern

Construction Loan Management: Administering the Construction Loan Process – Virtual Course


CFPB Final Collection Rules – Risk Readiness Briefing Webinar


Structuring Commercial Loans II – Virtual Course


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http://RMAHQ.ORG


http://www.rmahq.org


The Journal of Enterprise Risk Management

®

Editor-In-Chief Nancy J. FosterSenior Editor Frank DevlinExecutive Editor Edward J. DeMarco Jr. Contributing Editor Stephen KrasowskiCopy Editor Joe FerrySenior Designers Sarah Harrington and Christopher Santoro

Editorial BoardWilliam Ackerman, Director of Enterprise Program Services, US BankMichel Araten, retired, Managing Director, JPMorgan ChasePeter W. Buerger, Managing Director, Risk & MoreJohn Cassis, CRC James J. Clarke, Clarke ConsultingRichard A. Hamm, Owner/President, Advantage Consulting & TrainingEric Holmquist, Chief Risk Officer, Customers Bank Joseph Iraci, former Chief Risk Officer, TD Ameritrade, Inc. Jacob Kosoff, Head of Model Risk Management, Enterprise Risk Testing Group, Regions BankMaureen R. McCarthy, Senior Credit Officer, Brookline BankRobert R. Messer, Executive Vice President, Chief Financial Officer, American National Bank of TexasVincent Mulvey, Group Chief Risk Officer, Bank of IrelandKevin D. Oden, Managing Member, Kevin D. Oden Associates, LLCRichard J. Parsons, retired, Executive Vice President and Corporate Operational Risk Executive, Bank of AmericaRona Pocker, President, Turnaround Risk Management Inc. M. Robert Rose, Chief Credit Officer, Brookline BankBrian J. Scott, Executive Vice President and Managing Director of Private Banking, MidFirst BankNed Sergew, Senior Director, Corporate Compliance, U.S. Bank Roger Shumway, Executive Vice President and Chief Credit Officer, Bank of UtahBrian P. Sterling, Head of Compliance, Ally BankDev Strischek, retired, Senior Credit Policy Officer, Credit Risk Management Division, SunTrust Banks Inc.Kathy Swift, Senior Vice President, Heritage BankMichael L. Weissman, Counsel, Levin Ginsburg

The RMA JournalSubscriptions: Call 1-800-677-7621, or visit www.rmahq.org/TheRMAJournal. Annual subscription: $110. Discount price for individual members (Associates) from RMA institutions: $60. Individual copies: $25, members; $45, nonmembers. Fifty percent of the annual subscription price is the portion of each RMA Associate’s dues allocated to the Journal.

Address changes: Mail to The RMA Journal, Customer Care, 1801 Market Street, Suite 300, Philadelphia, PA 19103 or fax to 215-446-4101.

Article submission or comments: Editorial contributions are welcome. All articles submitted become the sole intellectual property of RMA. Authors have permission to reuse articles in print and on the Web, provided they indicate the article was published in The RMA Journal. For additional information, see Guidelines for Authors at www.rmahq.org. Contact Frank Devlin, 215-446-4137; (fax) 215-446-4101; (e-mail) [email protected].

Research, download, photocopy: Individual articles or entire issues can be researched and downloaded. Visit www.rmahq.org/TheRMAJournal. No parts of this publication may be reproduced, by any technique or process whatsoever, without permission.

Reprints furnished by RMA: Contact Customer Care, 800-677-7621; e-mail [email protected].

Advertising: E-mail [email protected]

INDEX TO ADVERTISERS

Automated Financial Systems

Inside front cover • www.afsvision.com

Model Validation Consortium

• www.rmahq.org/mvc

eMentor

Page 14 • www.rmahq.org/ementor

RMA Wharton Webinar Series

Page 15 • www.rmahq.org/wharton-webinar-series

RMA Self-Directed Online Learning

Page 23 • www.rmahq.org/self-directedlearning

RMA Dual Risk Rating

Page 41 • www.rmahq.org/dualriskrating

RMA Risk Readiness Webinars

Page 77 • www.rmahq.org/riskreadiness

RMA PROUDLY INTRODUCESNEW MEMBER INSTITUTIONS

Craft Bank | Atlanta, GA

Fortress Bank | Peoria , IL

ECIA Business Growth Inc | Dubuque, IA

Dart Bank | Mason, MI

First Bank of the Lake | Osage Beach, MO

Fusion Bank | Overland Park, KS

Taiwan Business Bank - Los Angles Branch | Los Angeles, CA

Evolve Bank & Trust | West Memphis, AR

Stearns Financial Services | Saint Cloud, MN

Pacific Premier Bank | Irvine, CA

PS Bank | Wyalusing, PA

Plains Commerce Bank | Hoven, SD

Community Bank of Santa Maria | Santa Maria, CA

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http://www.rmahq.org/TheRMAJournal



http://www.rmahq.org/TheRMAJournal



http://www.afsvision.com

http://www.rmahq.org/mvc

http://www.rmahq.org/ementor

http://www.rmahq.org/wharton-webinar-series

http://www.rmahq.org/self-directedlearning

http://www.rmahq.org/dualriskrating

http://www.rmahq.org/riskreadiness


Backed by deep industry experience, RMA MVC improves model validation from a time, cost, and quality perspective for banks of all sizes.

TYPES OF MODELS VALIDATED- Operational Risk

- ALM

- Strategic

- Wealth Management

- Market Risk

- Credit/Prepayment

- AML/Fraud

Created by RMA members for RMA members, the Model Validation Consortium (MVC) provides a comprehensive suite of high-quality model validation services at a competitive price point. Regardless of model type, scale, or regulatory requirement, you can count on MVC’s experienced analysts to solve your biggest model validation and model risk management challenges with ease.

WHAT WE OFFER• Access to industry-leading outsourced and co-sourced model validation,

re-validation, and review services.

• Bulk consulting hours to supplement internal knowledge and provide surge capacity.

• Independent examinations of model risk management programs.

MODEL VALIDATION CONSORTIUM

Increased Model Validation Effi ciency & Quality at a Competitive Price Point

Enterpr ise Risk • Credi t Risk • Market Risk • Operat ional Risk • Regulatory Af fa irs • Securi t ies Lending • Internal Audi t

SCHEDULE A CONSULTATION TODAY Ready to learn more about the benefi ts of enlisting the MVC’s expertise? Visit www.rmahq.org/mvc or contact us at [email protected] to schedule your consultation today.

WHY MVC?

Save up to 15%: We leverage the latest technology, similarities in models, and a large portfolio to cut costs, improve validation effi ciency, and increase quality.

Cutting-edge expertise: Tap into our deep pool of seasoned model risk management experts to ensure the quality of your validations will meet internal and external standards.

Proportionality: No matter the size and risk profi le of your institution, our service can scale to meet its needs and satisfy model validation expectations.

LEGAL CORNER

The Uniform CommerCial Code (”UCC”) sometimes pops up in the most unusual cases. One such example is Raffel Syst. LLC v. Man Wah Holdings Ltd., Inc., 2020 U.S. Dist. LEXIS 104321 (E.D. WI June 15, 2020), a case brought for alleged patent infringement.

ManWah, the alleged patent infringer, moved to dismiss the case alleging that Raffel, the patent holder, didn’t have the requisite standing to initiate a lawsuit. His effort was re-jected by the court.

First, a little bit about “standing,” i.e., whether a party is entitled to commence a lawsuit to rectify a wrong he or she has suf-fered. In patent law, said the judge, a party must satisfy two tests in order to sue for patent infringement. First, he or she must have exclu-sionary rights in the patent, meaning the right to prevent other folks from making, using, selling, or offering to sell, the patented item. Second, he or she must establish his or status as a “patentee,” meaning the original inventor, or his or her “successors in title.”

morialize assignments of title and that does not include recording security in-terests. This meant that the notices of security interest filed by the two banks in the Patent Office were of no legal effect whatsoever. The court fortified that conclusion by a reference to the Copyright Act that specifically in-cludes security interests as recordable documents. Implicit in this is that if Congress wanted to treat the Patent Act, which does not include security interests as recordable documents, in the same fashion as the Copyright Act, which does, it would have done so.

The court’s conclusion was that Raffel had standing to bring the in-fringement action, saying:

In sum, because the Patent Act does not address perfection of security interests, the mere act of the banks recording their security interests in Raffel’s patents at the USPTO did not transfer title of the patents to the banks. Nothing in the Intellec-tual Property Security Agreements states that Raffel is assigning title of the patents to the banks; rather, the agreements specifically state that Raffel is granting a “security interest” in its intellectual property… Raffel continues to hold title to the

patents…

WHAT’S THE POINT? Two conclusions can be drawn. First, that the grant of a security interest by a patent owner does not constitute an assignment of title (except for those very limited circumstances where “ti-tle” is relevant). And second, to per-fect a security interest in a patent, file a UCC-1 financing statement in the correct state filing office.

Title Is Reserved in Grant of Security Interest

On December 7, 2016, Raffel ex-ecuted an “Intellectual Property Se-curity Agreement” with The Private Bank and Trust Company granting the Bank a security interest in all of its intellectual property, whether then owned or subsequently acquired. The patents that were the subject of the litigation were listed as the col-lateral. Private Bank filed a notice of its security interest with the United States Patent and Trademark Office. (Note: This was an error. A UCC fil-ing should have been made). Private Bank’s security interest was released on August 9, 2019. Four days later, Raffel entered into a new “Intellec-tual Property Security Agreement.” This time it was with East West Bank. The same patents were listed as col-lateral. East West Bank also recorded its security interest with the United States Patent and Trademark Office. (Note: same mistake. It should have been a UCC filing).

Man Wah’s motion to dismiss the patent infringement case was pre-mised on the argument that when Raffel filed the lawsuit he no longer had title to the patents and, there-fore, lacked the necessary standing to proceed with the case. Man Wah con-tended that Raffel lost title to the pat-ents when he granted the security in-terests to Private Bank and East West Bank and each of them recorded their respective security interests in the U.S. Patent and Trademark Office. The judge didn’t buy that argument.

The court first referred to the Of-ficial Comments to Section 9-202 of the Uniform Commercial Code that explicitly reject the importance of title by stating, “the rights and duties of parties to a secured transaction and affecting third parties are provided in this Article without reference to the location of ‘title’ to the collateral.” The UCC is clearly concerned with allo-cating risk appropriately rather than monitoring who has title.

Continuing its discussion, the court noted that the Patent Office is not involved in the perfection of security interests. Its only function is to me-

LC

MICHAEL L. WEISSMAN is counsel to the Chicago law firm of Levin & Ginsburg Ltd. He is an instructor for RMA’s Commercial Loan Documentation course and a member of The RMA Journal Editorial Advisory Board. He can be reached at [email protected].

BY MICHAEL L. WEISSMAN

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Backed by deep industry experience, RMA MVC improves model validation from a time, cost, and quality perspective for banks of all sizes.

TYPES OF MODELS VALIDATED- Operational Risk

- ALM

- Strategic

- Wealth Management

- Market Risk

- Credit/Prepayment

- AML/Fraud

Created by RMA members for RMA members, the Model Validation Consortium (MVC) provides a comprehensive suite of high-quality model validation services at a competitive price point. Regardless of model type, scale, or regulatory requirement, you can count on MVC’s experienced analysts to solve your biggest model validation and model risk management challenges with ease.

WHAT WE OFFER• Access to industry-leading outsourced and co-sourced model validation,

re-validation, and review services.

• Bulk consulting hours to supplement internal knowledge and provide surge capacity.

• Independent examinations of model risk management programs.

MODEL VALIDATION CONSORTIUM

Increased Model Validation Ef� ciency & Quality at a Competitive Price Point

Enterpr ise Risk • Credi t Risk • Market Risk • Operat ional Risk • Regulatory Af fa irs • Securi t ies Lending • Internal Audi t

SCHEDULE A CONSULTATION TODAY Ready to learn more about the bene� ts of enlisting the MVC’s expertise? Visit www.rmahq.org/mvc or contact us at [email protected] to schedule your consultation today.

WHY MVC?

Save up to 15%: We leverage the latest technology, similarities in models, and a large portfolio to cut costs, improve validation e� ciency, and increase quality.

Cutting-edge expertise: Tap into our deep pool of seasoned model risk management experts to ensure the quality of your validations will meet internal and external standards.

Proportionality: No matter the size and risk pro� le of your institution, our service can scale to meet its needs and satisfy model validation expectations.

00-07.indd 700-07.indd 7 1/8/2021 4:28:55 PM1/8/2021 4:28:55 PM

http://www.rmahq.org/mvc


The RMA Journal February 20218

UPDATE ON ESG RISK

BY EDWARD J. DeMARCO JR.

ESG, or environmental, social, and governance risks, will likely assume increased importance under the Biden administration. As recently as August 2020, the SEC adopted amendments to modernize the description of business, legal proceedings, and risk factor disclosures that public companies are required to make under Regulation S-K. In the accompanying press release, the SEC noted that the amendments reflect the SEC’s “long-standing commitment to a principles-based, registrant-specific approach to disclosure.” 1 This approach was criticized by SEC Commissioner Allison Herren Lee, who commented that the amendments are “silent on two critical subjects: diversity and climate risk disclosures.” 2

Since August, movement on ESG risk has occurred in the Senate, with Senator Diane Feinstein’s introduction of a bill regarding climate risk; the submission of a proposal by Nasdaq to the SEC which would require reporting of board diversity by public companies; and the Federal Reserve Board’s recognition for the first time that climate risk is a sig-

RULES & RULINGSREGULATION, LEGISLATION, AND THE COURTS

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risk. The insurance industry is more directly affected by climate risk than other areas of the financial system. This provision would require the FIO to produce a report on how to modernize and improve climate risk insurance regulation in the United States. The report would be modeled on FIO’s 2013 report on modernizing state insurance regulation.5. Improve global coordination. Climate change is a global problem that requires international coordination. This provision would provide a sense of urgency for Con-gress that U.S. financial regulators should join the Network for Greening the Financial System, formally join the Basel Committee’s Task Force on Climate-Related Risk, and work with international regulators on climate financial risk to the extent possible.

Nasdaq DEI ProposalNasdaq has filed a proposal with the SEC to adopt new listing rules related to board diversity and disclosure to achieve inclusive representation across corporate America. The new listing rules would generally re-quire all Nasdaq-listed companies to pub-licly disclose consistent, transparent diversity statistics regarding their board of directors. The proposed rules would also require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. As of December 10, 2020, more than 300 banks are listed on Nasdaq.

The proposal is intended to provide stake-holders— not just shareholders—with an un-derstanding of the current board composition of each listed company. The proposal is also expected to enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.

Federal Reserve Notes for the First Time That Climate Change Is a Significant RiskThe Federal Reserve Board (Board) recently released its biannual supervision and regula-tion report that summarizes banking condi-

tions and information about the Board's bank regulatory and supervisory activities. The report includes detailed information on the strength of the banking system considering the economic and financial stresses from the COVID-19 containment measures. The re-port highlights, for the first time, the implica-tions of climate change for financial stability.

According to the Board, climate change adds a layer of economic uncertainty and risk that the Board has only begun to incor-porate into its analysis of financial stability. The report notes that different sectors of the economy and geographic regions face dif-ferent risks that will diverge from historical patterns. The report contains a discussion of how climate change, which increases the like-lihood of dislocations and disruptions in the economy, is likely to increase financial shocks and financial system vulnerabilities that could further amplify these shocks.

The Board noted that acute hazards, such as storms, floods, droughts, or wildfires, can quickly alter, or reveal new information about, future economic conditions or the value of real or financial assets. In addition, the Board observed that in the presence of rapid shifts in public perceptions of risk, chronic hazards (like a slow rise in sea levels) have the potential to produce similar abrupt repricing events. These repricing events and direct losses can, in turn, result in an increased frequency and severity of financial shocks; the timing and repercussions of these shocks are difficult to predict. In regions affected by se-vere events, households and businesses could

nificant risk for institutions. Each of these developments is covered below.

Senator Feinstein Introduces Climate Financial Risk Act On December 17, 2020, Senator Dianne Feinstein (D-Calif.) introduced the “Address-ing Climate Financial Risk Act,” a bill that would improve the ability of federal regula-tors to understand and mitigate risks from climate change within the financial system. Senator Feinstein introduced the bill because climate change is increasing the frequency and severity of wildfires, flooding, droughts, other natural disasters, and extreme weather events. The damage and risk generated by these events—in addition to changes needed to transition to a lower-carbon economy—threaten to severely disrupt real estate values in high-risk areas, dramatically change whole sectors of the economy, and make insuring against risk increasingly unaffordable. These trends, in turn, threaten the stability of the U.S. financial system, which is why it is so important to ensure financial regulators ap-proach them in a comprehensive way.

The bill sets forth five key prongs to help combat climate risk:1. Establishment of an advisory commit-tee on climate financial risk. The bill would establish a permanent committee on the Fi-nancial Stability Oversight Council (FSOC) made up of experts in climate science, climate economics, and climate financial risk. The committee would advise FSOC in producing a report that would include recommendations on how to improve the ability of the U.S. financial regulatory system to identify and mitigate climate risk.2. Update supervisory guidance on climate risk. The bill would require federal bank and credit union regulatory agencies to update their supervisory guidance to include climate risk and to develop a strategy to identify and mitigate climate financial risk.3. Update non-bank designation guidance.The bill would require FSOC to specify how it will incorporate climate risk into its decisions about whether to designate risky non-bank financial institutions as requiring additional oversight by the Federal Reserve.4. Require a Federal Insurance Office (FIO) report on insurance regulation and climate

" The new listing rules would generally require all Nasdaq-listed companies to publicly disclose consistent, transparent diversity statistics regarding their board of directors."

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become overleveraged if the value of their assets or income prospects become impaired. Consequently, certain financial institutions could be exposed to losses from disasters made more likely by climate change that are not accurately reflected in such institutions’ financial models.

The Board noted that climate change is likely to increase financial stability risks through real estate exposures. Some resi-dential and commercial properties will be subject to acute hazards such as storm surges associated with rising sea levels and more intense and frequent hurricanes. The Board also noted that continued productive use of these properties could require adaptation and investment. For example, as storm surges be-come more frequent, the expected value of exposed real estate may decrease, which may in turn pose risks to real estate loans, mort-gage-backed securities, the holders of these loans and securities, and the profitability of businesses using the affected properties.

Several policies or other factors noted by the Board could moderate climate-related financial vulnerabilities or the likelihood of large shocks. Within the financial system, increased transparency through improved measurement and disclosure could improve the pricing of climate risks, such as an in-crease in the frequency and severity of ex-treme weather events, thereby reducing the probability of sudden changes in asset prices.

The Board stated that continued research into the interconnections between the cli-mate, the economy, and the financial sector could strengthen knowledge of transmission, clarify linkages and exposures, and facilitate more efficient pricing of risk. The Board also noted that outside the financial system, efforts to mitigate or adapt to the physical effects of climate change through technologi-cal advances and policy changes could also reduce climate risks in the long run.

The Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System recently issued a joint statement to address the ability of a covered swap entity subject to the OCC’s or Federal Reserve Board’s jurisdiction, respectively, to service the cov-ered swap entity’s cross-border clients. The OCC and the Federal Reserve Board issued the statement considering the approaching end of the transition period during which the laws of the European Union have con-tinued to apply in the United Kingdom post-Brexit.

The OCC’s swap margin rule (12 CFR 45) was issued in 2015 with a phased com-pliance schedule stretching from 2016 to 2020. The rule’s requirements generally ap-ply only to a non-cleared swap entered on or after the applicable compliance date. A legacy swap is grandfathered and is general-ly not subject to the margin requirements in the rule. A legacy swap may become subject to the rule if it is later amended or novated on or after the applicable compliance date.

The European Union continues to rec-ognize United Kingdom participation in the European Union single market on an interim basis during the transition period, which was scheduled to expire on Decem-ber 31, 2020 (absent an extension). The United Kingdom and the European Union have not yet addressed the continuation of passporting rights for United Kingdom entities to provide financial services in the European Union at the expiration of the transition period.

There are financial services firms in the United Kingdom that conduct swap-deal-ing activities subject to the OCC’s or the Federal Reserve Board’s swap margin rule. The absence of an agreement between the United Kingdom and the European Union that addresses passporting rights would re-

sult in United Kingdom entities losing the ability to continue servicing their European Union clients when the transition period expires. Consequently, numerous financial services firms in the United Kingdom may begin amending their swaps to transfer their existing swap portfolios that face counter-parties located in the European Union to a related establishment located within the European Union or the United States.

The Consumer Financial Protection Bureau (Bureau) released a panel report on December 15, 2020, as part of its rulemak-ing process under Dodd-Frank Act Section 1071 governing the collection and reporting of small business lending data. The Bureau reported that a panel, comprised of represen-tatives of the SBA, OMB, and the Bureau, consulted with small entity representatives (SERs) likely to be affected directly by a Sec-tion 1071 regulation. The SERs provided feedback on the Bureau’s proposals under consideration for Section 1071 and the po-tential economic impacts of complying with those proposals. The panel and SERs also discussed regulatory alternatives to minimize potential impacts.

In their feedback, SERs were generally supportive of the Bureau’s statutory mis-sion to enact rules under Section 1071 and several SERs stated that a 1071 rulemak-ing is necessary to better understand the small business lending market. Further, SERs requested, and the panel agreed that, among other things, the Bureau should is-sue implementation and guidance materials specifically to assist small financial institu-tions in complying with an eventual Section 1071 rule, and to consider providing sample disclosure language.

The feedback from small entity represen-tatives and the panel’s findings and recom-mendations will be used by the Bureau as

SWAP MARGIN RULE: TREATMENT OF

CERTAIN LEGACY SWAPS AFFECTED

BY BREXIT AND THE SWAP MARGIN RULE

CFPB REPORT ON IMPLEMENTATION OF SMALL BUSINESS

LENDING DATA COLLECTION

REQUIREMENT

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and verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts.

The loan must also “season” by meeting certain performance requirements at the end of the seasoning period. Specifically, the loan can have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. The creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period.

The General QM Final Rule and the Sea-soned QM Final Rule will take effect 60 days after publication in the Federal Register. The General QM Final Rule will have a mandato-ry compliance date of July 1, 2021. Between the General QM Final Rule’s effective date and mandatory compliance date, there will be an optional early compliance period during which creditors will be able to use either the current General QM definition or the revised General QM definition. The Seasoned QM Final Rule will apply to covered transactions for which creditors receive an application on or after the effective date.

Note:1. https://www.sec.gov/news/press-release/2020-192

2. https://www.sec.gov/news/public-statement/

lee-regulation-s-k-2020-08-26

EDWARD J. DeMARCO JR. is RMA’s chief administra-tive officer, general counsel, and director of opera-tional risk, regulatory relations, and communications. He can be reached at [email protected].

it prepares a notice of proposed rulemaking to implement Section 1071. Feedback on the Bureau’s proposals under consideration submitted by other stakeholders will also be considered as part of the rulemaking process.

The Consumer Financial Protection Bureau (Bureau) issued two final rules on December 10, 2020, related to quali-fied mortgage (QM) loans. Lenders are required under the law to determine that consumers can repay mortgage loans before lenders make those loans. Loans that meet legal standards for QM loans are presumed to be loans for which consumers have such an ability to repay.

The first final rule, the General QM Fi-nal Rule, replaces the current requirement for General QM loans that the consumer’s debt-to-income ratio (DTI) not exceed 43% with a limit based on the loan’s pricing. The Bureau has created a new category for QMs, Seasoned QMs, under the second final rule.

Another current category of mortgage lo-ans that has been accorded QM status under the law are loans that meet the standards of the Government Sponsored Enterprises (GSEs). Most mortgage loans are QMs pur-suant to this provision, also known as “the Patch.” However, the Patch will expire on the mandatory compliance date of the General QM Final Rule (July 1, 2021), or the date the GSEs exit conservatorship, whichever comes first. The Bureau’s issuance of its two new rules will support a smooth and orderly transition away from the Patch and maintain access to responsible, affordable mortgage credit upon its expiration.

In adopting a price-based approach to replace the specific DTI limit for General QM loans, the Bureau determined that a loan’s price is a strong indicator of a consu-mer’s ability to repay and is a more holistic and flexible measure of a consumer’s abili-ty to repay than DTI alone. Additionally,

conditioning QM status on a specific DTI limit could impair access to responsible, affordable credit.

Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer had the ability to repay if the annual percentage rate does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set. A loan receives a rebuttable presumption that the consumer had the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points. In addition, the General QM Final Rule:• Provides higher pricing thresholds for

loans with smaller loan amounts, for cer-tain manufactured housing loans, and for subordinate-lien transactions.

• Retains the General QM loan definition’s existing product-feature and underwrit-ing requirements and limits on points and fees.

• Requires lenders to consider a consumer’s DTI ratio or residual income, income, or assets other than the value of the dwelling and debts; removes appendix Q; and pro-vides more flexible options for creditors to verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts for QM loans.The Bureau also is encouraging innova-

tion in the mortgage origination market through the issuance of the Seasoned QM Final Rule. The rule creates a new category of Seasoned QMs for first-lien, fixed-rate covered transactions that have met certain performance requirements, are held in port-folio by the originating creditor or first pur-chaser for a 36-month period, comply with general restrictions on product features and points and fees, and meet certain underwrit-ing requirements.

To be eligible to become a Seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions. As under the General QM Final Rule, the creditor must also consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling and debts,

CFPB ISSUES RULES TO PROMOTE ACCESS

TO RESPONSIBLE, AFFORDABLE

MORTGAGE CREDIT

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https://www.sec.gov/news/press-release/2020-192

https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26


https://www.sec.gov/news/public-statement/lee-regulation-s-k-2020-08-26


CYBER

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RAUD

POSITIVE DEVELOPMENTS REGARDING COVID-19 vaccines and therapeutics provide reassurance that an end to the pandemic may be in sight. Still, with the alarming spike in cases and deaths heading into the winter, the day when workers return to offices en masse is clearly months away. Several organizations, including some in the financial industry, have announced they do not anticipate a return until July.

At the New York Chapter of RMA’s annual Chief Risk Of-

ficers Round Table, chief risk officers said that while the transformation to work-from-home had been surprisingly smooth, the heightened culture, cybersecurity, and fraud concerns that accompany the COVID crisis would con-tinue as long as workforces at banks, their counterparties, and customers remained remote. Some elements of risk management, they said, simply cannot be performed with the same efficacy and confidence without people engaging

KEEP YOUR RISK MANAGEMENT GUARD UP AS THE PANDEMIC (HOPEFULLY) WINDS DOWN

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in person and/or at the office. “The shift to work-from-home required resiliency of our sys-

tems and processes,” said Senthil Kumar, Senior Executive Vice President and Group Chief Risk Officer, BNY Mellon. “We had been focused on resiliency for a long time and it really paid off.

“We made sure our clients received the utmost service, that our controls were working as efficiently as possible, and that we were focused on protecting the security and privacy of client information,” Kumar said.

But what has been missing, and what will remain missing until people return to offices, are the risk management abilities that can only be exercised through in-person human interaction, said Ben Golub, Chief Risk Officer, BlackRock.

At BlackRock, Golub said, “We put priority on and are big believers in proximity. If we are going to have risk takers at a location, we want the related risk managers to also be in that loca-tion. We want the risk managers to know not just the numbers associated with the risk takers. We want them to know the people, the mood, and the dynamics. We want them to be involved in the chitchat, to be connected to the investment processes going on. We lost that proximity.” Although organizations have success-fully employed technologies such as Zoom to allow colleagues to see and converse with each other in group settings, he said, “you don’t have that human dynamic in quite the same way. Interestingly enough, though, because communications are much more structured now due to the need to use Zoom-like applica-tions to communicate to groups, our risk managers do feel very much in the loop, in some cases even better than pre-COVID.”

“How do we have those coffee break or water cooler-type conversations with the people in the finance or legal departments? That is a challenge for risk managers,” said Deborah Hrvatin, CRO at CLS. “Sometimes we find out important information at the water cooler.” For a risk manager in the current environ-ment, she said, “it can be difficult to make our presence known because we are out sight out of mind.”

“The biggest challenge is making sure sizable teams keep a connection,” Hrvatin said. There is likely productive communi-cation with small groups on online communications platforms, she said, but “connectivity across the organization is where we are challenged now.”

“We need to think about potential threats on the horizon,” she said. “Could there be an uptick in conduct and culture issues? We are seeing more operational risks from the current environment. It is worrisome.”

A study by the cybersecurity firm Skybox noted a 72% in-crease in ransomware attack attempts in the first half of 2020. Many cyber threats, Hrvatin said, can be thwarted by employees knowing and taking the proper precautions. However, she said, “there could be a lapse. The longer we are in this situation, the more we will experience this challenge.”

There is also the possibility that with time out of the office continuing on, positive cultural forces and behaviors that had

A NEW RMA RESOURCE TO ASSESS THE CULTURE AT YOUR INSTITUTION

Whether you are concerned that the risk culture at your organization has been altered by the pandemic or would like to measure culture in a more systematic way, you will find value in RMA’s new Risk Culture Assessment Tool.

The tool provides a rubric to measure culture in 12 areas, including alignment, leadership, conduct, and transparency and escalation.

Each area is broken down into a series of statements that, depending on how your culture aligns with them, provide individual scores. The scores allow the strength of an organization’s risk culture to be assessed and benchmarked.

For example, the section on leadership asks how closely the following statements fit the institution that is being assessed: • The importance of risk management and ethical

behaviors starts with tone from the top.

• Leadership makes risk management a priority and demonstrates it in their actions.

• There is consistent, clear, and visible communication from leadership in terms of the importance of risk management and its role in driving ethical behavior.

• My institution’s leadership models strong risk management practices and ethical behaviors.

The tool will allow institutions to better align risk management culture with organizational strategy and objectives. It is available to members at rmahq.org.

been business as usual may not be so anymore. “You take for granted that they are embedded and maybe they will no longer be because of this,” Hrvatin said.

“A lot of nuances come from meeting and working with someone in person,” Kumar said. “You can glean a lot from small talk and walking the floor to the meeting room. At some point in time we start seeing a reduction in informa-tion from these methods. The challenge is to do all we can to make sure that does not happen.”

Event moderator Brian Strauss, Chairman of the RMA New York Chapter, summed it up this way: “You cannot take for granted certain things you might have taken for granted during the pre-Covid times in terms of risk culture or team productivity. You have to be more mindful and watchful for that, and find ways to the extent possible to do the best job you can.”

Along those lines, the panel discussed governance best practices.

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http://rmahq.org



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Kumar stressed the importance of maintaining a strong risk culture where, among many steps, the first line of defense truly owns the risk being taken. “You need to be able to understand the risk you are taking, understand what to do if things go wrong, and to mitigate risk,” he said. If all of those are not possible, Kumar said, “you do not want to take that risk.” Risk should be considered in every decision an organization makes, he explained, including those regarding new and modified products, processes, and policies.

Looking outside the institution, Golub said he was “concerned about the potential for increased fraud” in the market. “We have a situation now where the methods of due diligence [regarding customers and counterparties] are degraded. The ability to meet people and interact with people, and therefore the ability to protect yourself, is not the same.” At the same time, Golub said, the stresses of the pandemic create more incentives for fraudulent behavior. “Many businesses are under stress, so the ‘need’ to commit fraud is much higher. More entities are desperate. We have to approach due diligence differently.” At BlackRock, he

said, “We have determined that we cannot make cer-tain investments we would have made six months ago because we do not think the due diligence we can apply is adequate.”

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Current risk management practice is based on decades of quantitative theory and practice. But what happens next? For inside insight, join Wharton’s Dick Herring and risk expert Kevin Oden as they explain the evolution of model risk management from its introduction in the 1950s to today, where risk means managing the risk of the firm - not just the trading book.

In this virtual “fireside chat,” Wharton’s Dick Herring goes deep with Dr. Stephany Head, President of OpRisk Associates, on how to create the foundation for optimal decision-making in a complex world, and why it’s critical in an environment full of Black Swan events and Black Turkeys.

When Spyro Karetsos was an aspiring Chief Risk Officer he thought he knew everything that the role entailed. He knew all about strategic planning and execution, communication and collaboration, team building and goal setting, but what didn’t he know that he wished he had? Spyro describes in detail his journey to becoming a CRO (and CCO) and how his eyes were opened to the magic that goes on to put on a great show for all stakeholders.

The Wharton Financial Institutions Center

RMA invites you to a first-of-its-kind event: a three-part webinar in partnership with Wharton Business School on timely and relevant topics in the world of risk management. This series will bring you insights from industry and academic leaders with their finger on the pulse of key risk management disciplines, including model risk, credit risk, and operational risk.

Visit www.rmahq.org/wharton-webinar-series to learn more and register

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MODEL RISK MANAGEMENTJanuary 21, 2021 | 1:00−2:00 PM ET

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COMING FALL 2021, PHILADELPHIA, PA

RMA WHARTON WEBINAR SERIES

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http://www.rmahq.org/wharton-webinar-series

http://www.rmahq.org/the-rma-wharton-advanced-risk-management-program


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BANKING and the

Future of Everything

Author, educator, and trend spotter Mauro Guillen on the tipping points that will def ne the next decade and beyond.

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Q&A

RMA JOURNAL: You have said that COVID is speed-ing up change. We are certainly seeing this in the financial industry, where, out of necessity, customers and workers are doing so much of their business remotely. Does this acceleration mean we will get to your 2030 state sooner that you originally thought?

GUILLEN: Yes. Perhaps I could have called the book 2027 or 2028. Indeed, the pandemic is a great accelera-tor, unlike other crises that have represented a reversal of trends. For the most part, this pandemic puts preexisting trends on steroids. That includes the adoption of technol-ogy with implications for financial services.

RMA JOURNAL: Are other dynamics besides tech-nology being sped up because of the pandemic?

GUILLEN: Many. The population is aging more quickly. When there are economic difficulties and people lose jobs or see their wages cut, couples postpone having babies. They do not want to bring a new life into the world under these circumstances. Another is the rise of East Asian emerging markets. They are doing well be-cause they brought the pandemic under control and are growing faster. The existing growth differential between them and the U.S. is going to be wider as a result of the pandemic, and the future in which China will be

Mauro F. Guillen, holder of the Zandman Endowed Professorship in International Management at the Wharton School of the University of

Pennsylvania, frequently shares his global market trends expertise outside the confines of academia. He serves on an advisory board to CaixaBank of Spain; is a go-to guru for business news publications and broadcasts; and is a sought-

after consultant and speaker. Prior to the pandemic, Guillen completed an ambitious book that explains the trends that will outlast COVID and affect the world economy for years to come. In a recent interview with The RMA

Journal, he spoke about his book, 2030: How Today's Biggest Trends Will Collide and Reshape the Future of Everything, and the ways the enormous geopolitical, demographic, and climate-related changes we are about to

experience will affect the banking industry.

the largest consumer market in the world is going to be arriving a little earlier.

The inequality that has been growing in income, health, and wealth over the past 30 to 35 years is also accelerating with the pandemic. The virus affects certain people more than others. Some can’t work from home and have to use public transportation. Certain minority groups are being affected disproportionately. Inequality also manifests itself in terms of access to education. Not everyone has the hardware or space to study fruitfully in a remote setting. This pandemic unfortunately accelerates the trend toward inequality and it’s something we have to take very seriously.

RMA JOURNAL: You told Forbes that you read every day about a topic you know nothing about. Why? Would this be good for risk managers, who need to always have their antennae up for emerging risks and challenges that might not appear on a risk dashboard?

GUILLEN: Part of my methodology for being able to think laterally is to force myself to read every day 15 for minutes on a topic I don’t know much about. If you do this you start developing an ability to make connec-tions. When it comes to risk, we are in the midst of many transformations. So many things are out of whack that the potential for unforeseen circumstances is greater. Risk managers have to be especially careful. The upside is very

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big but so is the downside. You would be wise to anticipate interconnections. Trends beyond your field of vision may affect the things you think about on a daily basis.

RMA JOURNAL: How do you seek out information on unfamiliar topics and ideas?

GUILLEN: I try to meet with people who are not my closest colleagues. I try to expand my circle. And before I go to bed I use my phone and just search for a topic I don’t know much about. I am developing skills to have peripheral vision and look for lateral connections.

RMA JOURNAL: How can organiza-tions become better at this kind of lateral thinking?

GUILLEN: It can be difficult because we are all siloed in our organization. Each employee has a job description. Leaders need to send a message that your job is not just doing your job. Your job is making connections. It’s making sure the company is not missing out on an opportunity or is not blind to a threat because everyone is just “doing their job.” We have to go beyond that in this increasingly complex and rapidly chang-ing world. Leaders must set an example from the top and provide incentives and opportunities for people to relate to one another. People are typically good at defining vertical relationships in a firm—who reports to whom—but not at horizontal information exchange. When the world is changing, that abil-ity to make connections horizontally and exchange information in an organization is extremely important.

RMA JOURNAL: In your work and your writing, how often do you think about risk?

GUILLEN: Risk is extremely important because no matter the opportunity, the wisdom of pursuing it all depends on the level of risk. An opportunity that looks wonderful may not be as attractive with a high level of risk. It is two sides of the same coin. I always pay attention to risk. When I make presentations, I always include a segment on risk and helping people understand it.

In the current context, the best way to tackle risk is to avoid making decisions that are irreversible. No matter how well you calculate risk, you can make a mis-take, especially when things are changing so rapidly. If you are not making an ir-reversible choice, you can always make a course correction. But if you make a

CONNECTING THE DOTS AT THE RMA/WHARTON ADVANCED RISK MANAGEMENT PROGRAM The Wharton Financial Institutions Center

In recent years, Mauro Guillen has often been among the thought leaders featured at The RMA/Wharton Advanced Risk Management Program, which will be held this year starting the week of August 22 and finishing the week of October 17.

The program provides banking executives analytical frameworks, strategies, and resources to better measure, manage, and monitor risk at their organizations. In addition to its focus on the known and quantifiable challenges of credit, market, and operational risk, the program focuses on the unknowable and difficult to measure risks, including business, strategic, and reputation.

“It is extremely important, as I mention in 2030, to go beyond the familiar to expose one’s self to new areas of knowledge and new ways of doing things,” Guillen says. “Most of the action today in innovation, new business ideas, and opportunities seems to be at the interaction of different fields. The RMA/Wharton program brings me in to provide what I think is a refreshing perspective on the different things going on in the world and how to make sense of them by learning to connect the dots.”

“It is straightforward to calculate risk when we know the parameters and we can make safe assumptions,” Guillen says. “The problem is, as the world evolves before our eyes, it is becoming increasingly difficult to make safe assumptions or look for the same parameters as in the past. To adapt to this new situation, it is important to explore new ways of thinking that go beyond our comfort zone, and talk to people with different perspectives. Without that, we will be digging deeper into what we already know how to do.”

More information on the RMA/Wharton Advanced Risk Program is available here.

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https://executiveeducation.wharton.upenn.edu/for-individuals/all-programs/rma-wharton-advanced-risk-management-program/


decision that cannot be taken back, you may be running yourself into a dead end.

RMA JOURNAL: What is an example of an irreversible decision?

GUILLEN: A company shutting down an entire division because they believe the opportunities are not good. It may be true that there are limited opportunities, but often decisions are made in a gray area. There might be a chance to turn things around, and you are making a decision based on today’s circumstances. Maybe a year from now you will regret making that drastic decision.

Perhaps you can move incrementally, by either expanding or reducing opera-tions in a certain area gradually but not completely. The idea is to create options for the future so you can exercise them one way or the other depending on how circumstances change.

RMA JOURNAL: It seems like you are saying we should always be re-spectful of uncertainty, and realize the limitations of what we know.

GUILLEN: Let me begin by saying that uncertainty is different than risk. You cannot quantify uncertainty or put a number on it. You are in the dark, unless you can somehow find a parameter or a way of quantifying it. You are making decisions as you go and finding out about what happens on a given day or week, and tracking how your competitors are reacting to the same uncertainty. The best way of thinking and making decisions in that context is updating your prior knowl-edge. Engage constantly in the process of discovery and then incorporate that into your decision making.

RMA JOURNAL: You have said the decade ahead will be the decade of greatest change in our lifetimes. Why do you believe this, and is that to say 2030 to 2040 will not also be a time of rapid change? Or any future decade for that matter?

GUILLEN: As I noted earlier, the pandemic is accelerating preexist-ing trends—demographic, emerging technology, and others that have been building for 20 to 30 years. What is going to happen more or less around the year 2030 is those trends are going to reach a tipping point. For example, the U.S. will no longer be the largest consumer market in the world. That is going to have a lot of implications. Companies will increasingly think in terms of consumer markets other than the U.S., especially China, in the same way that for the last 50 to 75 years most companies had the U.S. consumer in mind to guide their strategic decisions. China has been growing faster than the U.S. for 30 years but will only reach a tipping point in the next five to 10 years.

The same goes for India and Africa. I predict in my book that after China becomes No. 1, India will surpass it because it has a younger population. Meanwhile, Africa will become the next frontier in international business. We need to be ready for a succession of tipping points. What makes this next few years unique is the world has been changing for decades but the trends we have been watching have not yet reached critical levels. But they will and we will reach tipping points in history.

RMA JOURNAL: One of the major themes in 2030 is the further accu-mulation of wealth women will achieve in the next decade. Can you talk about how that could impact the economy?

GUILLEN: Although there is still dis-crimination against women, they are making progress in terms of their part in the labor market, access to education, and better jobs and wages. So much so that by the year 2025 or 2026, more than half the net worth in the world will be-long to women. This matters because, as research shows, men and women are different in terms of economic and fi-nancial activity. One way they differ is women are more risk averse than men. For example, women take fewer risks in

terms of asset class with their pension funds, while men trade more frequently (which is not a good idea). Another example is insurance. If you prefer bet-ter insurance you are willing to pay a higher premium. Women prefer lower deductibles on home and auto insur-ance, which means higher premiums. They are willing to spend more money on comprehensive insurance. As we have more wealth controlled by women, we are likely to see a shift towards asset classes, types of investing, and insurance that provide protection against risk. An additional thought, though, is that men and women change. When men acquire more experience about how to invest they reduce their level of risk, maybe because they get burned in the market. Women increase risk as they get more experience investing, and start to converge on men, though not completely, in a regression to the mean.

RMA JOURNAL: Another theme in 2030 is the continued aging of society.

GUILLEN: When we talk about the population aging, we tend to emphasize the disadvantages. Who will pay for the pensions? The health care? Because of this loss-aversion bias, we tend to forget about the potential opportunities. It’s important to recognize we are living longer. A man who turns 70 today has a good chance to live another 25 years, a woman another 30 years. That’s another lifetime. Traditionally, we were educated in terms of thinking about life as a se-ries of stages. First you play. Then you study. Then you work. Then you retire. That made sense when the average life expectancy was shorter. Now that the average life expectancy is 85 or 90 it doesn’t make sense.

There are two implications. One is, the biggest segment of the population will be above 60. It used to be that the largest seg-ment was the younger segment. We have been having fewer babies for the last 70 years in the U.S. Generations are getting smaller and the wealth is at the top. An-other thing to consider is a 70-year-old is

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in much better physical and mental shape today than a 70-year-old 50 years ago. That person can consider a second career.

We shouldn’t think about going to school only once. Maybe we should go to school full-time twice or even three times. That is important when knowl-edge and technology are changing so quickly. Instead of thinking in terms of how many jobs we will have over our lives, we should consider how many careers we will have—especially when the skills a person may have acquired 50 years ago are becoming obsolete. We are experiencing many political and so-cial problems because people in their 50s lose their jobs and the job they know how to do is no longer in demand and they feel forgotten. That has led to tensions in many parts of the world. This could be a way to avoid that. We would be helping those people, their communities, and society as a whole. RMA JOURNAL: What are the main challenges and opportunities for banks in the next decade?

GUILLEN: When I speak to audiences of bankers, I often ask them to react to this statement: Of the following three entities, which has the highest prob-ability of surviving all of the changes in technology, demographics, and emerging markets we see today: banks, banking, or bankers? Invariably, more than 90% vote for banking. That reveals something very important. For the last 150 years we have been doing financial services according to a very specific organizational model that includes banks and bankers. But the younger generations don’t want to go to a bank branch. They want to do everything with their phone. So other types of players that are not banks have a chance of growing and making big profits in financial services.

The interplay among technology, demographics, and regulation is the big challenge for financial services going forward. Unfortunately, many of the established institutions suffered a huge reputation loss 12 years ago. With this

pandemic they have an opportunity to renew their trust. They have an opportu-nity to show they can be part of the solu-tion as opposed to part of the problem.

They will have to work very hard because young people have a different idea as to what financial services should look like. Technology is disintermedi-ating everything, and among those being intermediated are banks, which is why so many of them are trading below book value.

The challenges are formidable but the building blocks are there for banks to reinvent themselves. They will have to do that after 150 years of literally the same model of doing financial services that es-sentially emerged in the second half of the 19th century. The next few years will be years of much change. Banks are going to survive, but only the good banks—the ones that incorporate new ways of think-ing and competing. Unfortunately, some banks will go bust because they will not be as agile and flexible as others.

Another important challenge for banks and any company is the pandemic has instilled in people ‘s minds the idea that everyone has to pitch in and help us overcome this crisis. Corporations across the board, and financial institutions in particular, are being asked by consumers not just to do their job and provide the goods and services they focus on, but also help society overcome the big challenges of the day, including the pandemic, in-equality, and other larger global issues, such as ocean contamination, air pollu-tion, and climate change.

RMA JOURNAL: In your recent Harvard Business Review piece, you wrote about the importance of pivot-ing during COVID. How have banks pivoted, and what kind of job do you think they did overall?

GUILLEN: At a moment in which monetary policy is not enough, you also have to engage in fiscal stimulus. Government cannot just say, “We are going to spend this money.” You need to get the money to recipients,

whether they are small businesses or large companies or the many people whose jobless benefits are expiring. The banking system played the pivotal role in getting the money to the beneficia-ries and in many cases evaluating how much money a given business should be given of the stimulus.

The pandemic offers banks an op-portunity to show how relevant they are, and how we certainly need bank-ing. The question is whether we can do without physical banks and just use apps on our phone. Going forward, how will banking be delivered? How will it add value? The financial sector always has a role to play in the market economy. It has to be part of the solu-tion. It should never occur again that it is the problem, as in the financial crisis. If banks and other financial ser-vices players understand they have to be part of the solution, then the future for them is bright and there is lot of op-portunity. The market economy cannot work without the plumbing and all the value-added services financial institu-tions and intermediaries provide.

RMA JOURNAL: What role will cryptocurrency play as we head toward 2030?

GUILLEN: I don’t know of any major bank not investing to position itself for a world where there will be cryptocur-rencies. Every major financial institu-tion is hiring, conducting research, or launching initiatives to be a player in this cryptocurrency world. But let me say one thing that is extremely important. I don’t think cryptocurrency as currently envisioned will succeed. The reason is governments and central banks will not allow that to happen. When Face-book announced Libra [now known as “Diem”], within days the Federal Re-serve, the European Central Bank, and some governments came out in opposi-tion. They don’t want to lose control over the money supply and monetary policy.

Cryptocurrency shouldn’t be seen as a substitute for legal tender. We

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should be thinking about cryptocur-rency as one of several components of digital tokens that facilitate things such as discounts and incentives to consume less energy, pay for health care or insur-ance products, and enable us to interact with the government or even vote in elections. I see a bright future for a set of digital tokens that help us run our lives and conduct business.

RMA JOURNAL: What about fiat digital currency?

GUILLEN: Governments are already coming up with plans. China is launch-ing their digital currency in mid-2021. China sees this as an opportunity to modernize their monetary system, which is still quite backward, and ensure China will not only be the largest economy and the largest trading nation in the world, but also a major financial powerhouse. However, with the currency they have and all the regulations and constraints around it, they are still very far away.

India views digital currency as a con-venient way of eradicating corruption and modernizing their monetary system. Central banks will be playing in this area. There is room for private actors as well, as long as they don’t try to compete head-on with governments.

RMA JOURNAL: What will the dominant geopolitical risks be in 10 years compared to now? Where are we headed?

GUILLEN: One major risk is climate change, and the possibility that we may have more climate refugees than refugees from armed conflict. Related to this would be food security as a major category of risk. Another risk is the geopolitical fight for control over new technologies such as AI and biotech, with the U.S. and China quickly emerging as the leaders in this global race for development and imple-mentation. A third is Africa, which will very quickly become the second-biggest region by population. This is an opportu-

nity but also a potential threat. Between now and 2030, 450 million babies will be born in Africa. If Africa cannot feed and educate its population, if we do not handle that properly, that can be a liability for the entire world.

I do see one risk very quickly dis-appearing, the one stemming from our dependence on fossil fuels. Two things have changed. One is that the U.S. has become a net exporter of fossil fuels, lessening dependence on parts of the world that are very unstable such as Venezuela and the Middle East. More important for the longer run is that greener, alternative sources of energy have at long last become competitive with fossil fuels, especially coal.

We have solar. We have wind. In the near future we will see biomass and sev-eral other technologies, and hopefully hydrogen cells at some point. It will end the situation we have had the last 70 years where dependence on politi-cally unstable parts of the world have

"We should be thinking about

cryptocurrency as one of

several components of

digital tokens that facilitate

things such as discounts

and incentives to consume

less energy, pay for health

care or insurance products,

and enable us to interact

with the government or

even vote in elections."

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overdetermined U.S. foreign policy. That’s going to be a big change. It’s already been happening, but will be accelerating as technology for greener sources of energy becomes much more competitive in cost.

RMA JOURNAL: How much will the political situation in the U.S. impact the geopolitical risk of the coming decade?

GUILLEN: The U.S. will continue to be the indispensable power in the world, but will not be in a position to always impose its view or its position. The U.S. will be more effective in advancing its own national goals by collaborating with lesser powers. It will continue to be the preeminent military power, including, I hope, in cyber warfare, which is the new dimension.

The name of the game should be to change our mindset. We don’t have to be the No. 1 economy in the world. We don’t have to be the indisputable superpower to deliver very high stan-dards of living to the population. That is the fundamental shift we have to go through. We can have a very wealthy population and a very successful econ-omy and society without being No. 1. This has been happening elsewhere for 100 years. Tiny countries such as Denmark, Sweden, and Singapore are extremely successful economies. Their people enjoy extremely high standards of living. But they are very far from the No. 1 economy or power. We need to understand that we can-not impose our will unilaterally on everyone in the world. At the same time that doesn’t mean we have to be poor; quite the contrary if we play our cards in the right way.

RMA JOURNAL: What role will banks have as the world as a whole adapts to and confronts the climate crisis?

GUILLEN: Climate change is one of the large-scale problems that requires us to use every tool at our disposal. We

need governments to agree to certain standards. We need to invest in technol-ogy so we can overcome our dependence on fossil fuels. We need to change con-sumer behavior and provide incentives so people are less wasteful in using resources and energy. It is incumbent on banks to play a leading role in this. If they do they will be able to rebuild their reputation that was so damaged by financial crisis, especially among the younger generation, who feel climate change is a problem they are inheriting from us—and which affects them more than the older generations. Banks can use the crucial role they play in lending to help steer our economies from fossil fuels to environmentally friendly energy and away from plastics so we reduce the contamination and pollution that comes from them.

RMA JOURNAL: How can banks balance that goal with the interests of shareholders who want to maxi-mize gains?

GUILLEN: It all depends on people’s willingness to pay more for a good or service that is environmentally friend-ly. Every survey I see finds that people in their 20s and 30s are willing to pay more for a t-shirt or a car that is more environmentally friendly than the

competition. There is a business case to be made that the bottom line can be protected if every company, including banks, does the right thing regarding climate change and the environment. The other thing is, hopefully we will soon be in a situation where there is no such tradeoff. We will no longer have to pay more if we want to be environmentally friendly. The only way to achieve that is though technol-ogy. That brings us back to the role of banks in funding initiatives by start-ups that will give us the technology we need to eliminate that tradeoff. That would be the end game, a situation where doing the right thing makes sense economically, and you are not paying a cost for being environmen-tally friendly. Technology can help us accomplish that. Anything banks can do to facilitate that technological change by investing resources and al-locating credit in that that way would be very important.

No one wants to have to choose between efficiency and saving the planet. We would prefer not to be put in that position. In the long run it will be good business for banks to help society with these problems. They will be rewarded if they launch new programs and initiatives to move in that direction.

"Banks can use the crucial role they play in lending to help steer our

economies from fossil fuels to environmentally

friendly energy."

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Dean A. Yoost, the author of three previous RMA books that provide wisdom not only for boards but for practitioners throughout your institution, has authored a fourth RMA book, Board Oversight of the Constancy and Speed of Change.The volume provides wisdom on how to transform and adapt to change, an organizational value that needs to be clearly defined, measured, and above all treasured. The book will be available in late spring. Yoost’s other RMA books, A Direc-tor’s Voyage Through Risk Management, Navigating Information Technology in the Boardroom, and Illuminating Data in the Boardroom, are available through RMA's website, www.rmahq.org, and Amazon.com.

REMAINING AWARE as the world is constantly and rapidly changing is a challenge for board members. Given that the average age of directors is 62 and the average public company director has been in that board seat for a de-cade, most are of a vintage and pedigree of experience in which terms such as digitalization, platform businesses, and agile are not in their lexicon. For the most part, board members are nearing the sunset of their working careers. While many remain current, some are retired in place, lingering on with memories of the past. These

peer directors are highly intelligent, thoughtful, and well-intentioned but focus on recounting war stories. In contrast, today’s changes have brought new ways of problem-solving, managing, and leading, all of which require directors to be (or become) exceptionally cre-ative, adaptive, and nimble. How can board members become more aware of, and better understand, today’s changes and the implications of what is happening and coming?

To examine the contours and dilemmas of our times, board members need to commit to a process of continuous learning and critical thinking. What this encompasses depends on the director and the needs of the organization, its industry, the environment, and the board itself. The technology sector, for instance, requires a much different acumen and set of board skills than more traditional industries such as banking and insurance, which are highly regulated. Continuous learning goes beyond one-hour technical sessions led by management each quarter. It involves being current on the important issues, which requires self-study and interactions with those engaged and specializing in the field. Some directors speak or write to stay current while others participate in other forms of continuing education. All board members need to approach change by thinking critically, with an openness cultivated and adapted through a growth mindset.

The illiterate of the 21st century will not be those who cannot read or write but those who cannot learn, un-learn, and relearn.– Alvin Toffler, an American writer and futurist (1928-2016)

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http://Amazon.com


“Change is all-encompassing and metastasizing so that directors need to challenge themselves to remain aware and expand their knowledge in what is most important not only today but also tomorrow and beyond,” said J. Michal Conaway, a board member at Quanta Services, Inc.

CONTINUOUS LEARNING

John P. Kotter writes in Leading Change that the demands and rewards associ-ated with lifelong learning are accel-erating because of the changing envi-ronment. In a static world, he argues, virtually everything can be learned at a very young age. In a world that is con-stantly changing, this is no longer the case. As the rate of change increases, the willingness and capacity for board members, executives, and employees to learn and develop are central to the organization’s future success.1

Kotter emphasizes that a key attri-bute of continuous learning is the will-ingness to take risk. Lifelong learners push themselves out of their comfort zones and experiment with new ideas and new things. Risk taking produces both bigger successes and inevitably more failures. Kotter suggests that lifelong learners humbly and honestly reflect on their experiences to educate themselves. They solicit opinions and input from others. They do not assume to be all-knowing but rather seek and treasure opposing views. Much more than others, lifelong learners listen in-tently with an open mind. They know that listening facilitates feedback on the impact of their actions. Continu-ous learning involves being open to new ideas and a willingness to view life with an unburdened mind.2

Kotter writes that change needs to be embraced by adapting and learning how to cope with it. He refers to this as “leap-ing into the future.” Directors need to recognize that in today’s environment of constant and rapid change, the critical-ness of committing to continuous learn-ing is a personal imperative.3

Jim Harbaugh, who coached Stan-

“Board members need to adapt to being uncomfortable. When thinking is new and circumstances change, people have a ten-dency to want to stick to their current state. Getting accustomed to being uncomfortable is an important antidote. This mindset is not limited to learning but includes new experiences and situations as well as being able to experiment with new things,” said Kristy Pipes, a board member of PS Busi-ness Parks and Public Storage.

Continuous learning is such an oft-heard phrase that it is almost a cliché. Even so, it is essential that directors and executives adopt the mindset and

ford University’s football team and the San Francisco 49ers and is now at the University of Michigan, has a history of turning losing teams into winning ones in just a few seasons. He quipped, “You are either getting better or you are getting worse. You never stay the same.” In today’s world, and particularly in the boardroom, mechanisms for continuous learning need to involve both the head and the heart. These include assessments on what to keep doing, what to stop do-ing, what to start doing, and an inspira-tional approach to motivate everyone to join the journey.4

PARADOX OF SUCCESS

Barry O’Reilly writes in “Get Comfortable Being Uncomfortable” that there comes a time in the life of every individual when doing the things that brought you success in the past no longer deliv-ers the same outcomes. You wake up, walk into your office, and sit at your desk just as you always have. But suddenly, you are stuck, stagnated, unsatisfied, or struggling with what was once your secret to success. You might find yourself asking: Why am I not living up to my expectations? Why can’t I solve this problem? Why do I continuously avoid taking on this particular challenge?

The world evolves, conditions change, and new norms emerge. Instead of adapting, people find themselves stuck in their patterns of thinking and behaving. Most do not realize the new situational reality until it bites. This is called the “paradox of success.” While certain methods of thinking and doing may have brought you success in the past, it is almost certain that it will not bring you to success in the future. The key is to recognize the signals and break through before it is too late. Your once successful approaches can cause your disappointment and downfall. The challenge is to make the adjustments and adapt by not getting caught in the past.

Source: After Shock, edited by John Schroeter, Abundant World Institute, 2020.

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practice. When the pace of change is accelerating, the National As-sociation of Corporate Directors (NACD) emphasizes, the most successful boards and organiza-tions are those that learn faster than their competition.5

The NACD suggests that con-tinuous learning is most effective as a collaborative effort between the board and management. It is the role of management to help acquaint the board about what is most important. Directors can help executives understand the board’s

expectations for the learning process and their information needs. At the same time, board members should not rely solely on management for all the information and perspectives that they receive. Boards need to seek out other sources to help them deepen their under-standing and expand their knowledge.6

The NACD offers the following suggestions to board members in their pursuit of continuous learning: • It is important for the entire board

to stay curious. Curiosity can be facilitated through experiential learning where the board visits ex-

ternal sites or meets with outside subject matter experts.

• There is the need to focus collec-tive learning on new technologies. This includes not only the features of emerging technologies but also the reasons why they are disruptive and how peers are succeeding in using them.

• Longer-serving directors can ben-efit from periodically refreshing their knowledge of the fundamentals. For instance, they may want to participate in new director orientation to under-stand how management’s framing of

CONTINUOUS LEARNING, LEADERSHIP SKILLS, AND THE CAPACITY TO SUCCEED

Personal history

Inborn capabilities.

Childhood experiences.

Job and educational experiences.

Competitive drive

Level of standards.

Desire to do well.

Self-confidence in competitive situations.

Lifelong learning

Willingness to seek new challenges.

Willingness to reflect honestly on past successes and failures.

Skills and abilities

Knowledge and experience.

Leadership skills.

Competitive capacity

Capability in dealing with an increasingly competitive and fast-changing environment.

Source: Leading Change, by John P. Kotter, Harvard Business Review Press, 1996.

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the issues may have changed.• The learning imperative applies

equally to management. In some cases, executives are encouraged by directors to take outside board posi-tions with organizations that are not competitors in order to broaden their perspectives.7 Continuous learning can include

special sessions in which the board re-flects on governance failures that have happened elsewhere, perhaps at com-petitors in their industry. The NACD notes that these deep dives offer impor-tant lessons about how and why other boards may have struggled to deliver the proper oversight, what the blind spots were, and whether similar threats and vulnerabilities may be present on their own board.8

“Although there is no template or one acceptable approach, there are multiple ways for directors to learn. They should read broadly about business and history, think critically, and maintain a thirst for knowledge. Participating in outside board governance conferences is especially help-ful,” commented Hoshi Printer, a board member of Lantronix, Inc. and IMRI.

Board members should consider the words of one of the most accomplished artists of all time, Michelangelo, when he was 88 years old. He simply said, “I am still learning.”

STAYING INFORMED

Nina A. Bowman writes in the HBR Guide to Thinking Strategically that it is essential in a constantly changing environment for board members, executives, and employ-ees to understand and agree not only on the objectives they are striving to achieve but also on the key developments and trends that may impact the attainment of their goals. She notes that the failure to pay attention to external signals, or to wait until a signal becomes too strong before taking action, has consequences. During times of change, board members need to stay informed about the market and the needs of customers, competitor movements, trends in new technologies, and other emerging developments.9

In addition to internal briefings by management, Bowman suggests that an array of sources are available for directors to remain aware, such as: (1) news and competitor analysis; (2) research from in-dustry groups, government agencies, and trade associations; (3) interactions with members of other boards and executives; (4) reviews of demographic, economic, social, cultural, technology, and political trends; and (5) the opinions of experts. She emphasizes the criticality of connect-ing seemingly random signals. While stay-ing informed and thinking strategically, Bowman points out that it is important for directors to challenge the underlying assumptions, seek data that goes against common beliefs, and consider the uncon-strained viewpoints of others.10

Henry David Thoreau once said, “Read not the times. Read the eternities. Knowledge does not come to us by details but in flashes of light from heaven.” It is important for board members to connect the dots by focusing on the trends taken from the piecemeal parts.

Directors today need to process volumes of information at a rapidly in-creasing pace. In converting data into knowledge, Bowman writes, management should understand that directors seek not only source data but management’s perspectives on that data. Directors need to know the highlights (what has gone well), the lowlights (what has not gone well), the headlights (what is coming or anticipated), and the insights (thoughts about where the organization is and where it should be). These categories of information should be prioritized in the communications between the board and management.11

“Networking with other board members at events sponsored by the NACD, Women Corporate Directors, and other organiza-tions is a valuable and stimulating way to learn. It is an opportunity to share experi-ences. Teaching and speaking are other ways in which directors can remain informed by investing time to prepare and interact with others,” said Christobel E. Selecky, a board member of ImmunityBio, Satellite Healthcare, Inc., and Teleperformance SE.

FIXED VS. GROWTH MINDSET

Philosophers and researchers have for some time believed that intelligence was fixed and could not be altered. But as a result of research in neuroscience, it is now evident that the brain is continuously evolving and maturing. In her book Mindset: The New Psychology of Success, Carol Dweck, a Stan-ford University psychologist, describes the differences between a fixed mindset and a growth mindset. She writes that people with a fixed mindset believe that intel-ligence is static and cannot be changed. Those with a growth mindset, however, believe that intelligence is constantly in a state of motion and evolution. Although there are extreme cases, most people lie on the continuum between a fixed and growth mindset. Certain environmental conditions and structured nurturing can also bring out different mindsets.12

According to Dweck, a fixed mindset suggests that an individual’s intellectual qualities are cast in stone, creating urgency for the individual to prove relevancy over and over. If the individual has only a certain amount of intelligence, an estab-lished personality, and a developed moral character, then that person will need to prove they have a healthy dose of it. The individual would not want to be perceived as deficient or lacking in these most basic qualities.13

A growth mindset is premised on the belief that basic characteristics are things individuals can cultivate and de-velop through their own efforts with help from others. Dweck writes that although people can differ in every which way pos-sible (e.g., talent, aptitude, interests, and temperament), everyone can change and further develop their intelligence capabili-ties through astute application and hard work.14

Directors who possess a growth mind-set are better able to positively respond to circumstances that are fast changing and uncertain. They tend to be lifelong learners. Dweck emphasizes that when obstacles are encountered, people with a growth mindset will follow a refined path to the future and exhibit an ability to get things done. In contrast, those with

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In 2008, four retired executives, who were relatively new corporate board members at the time, met to discuss their desire for continuous learning and engagement with other directors. They decided to form a group and named it the Corporate Directors Roundtable of Orange County. The intent was for the California-based group to remain small, unaffiliated, and meet quarterly to discuss topics that were both relevant and intellectually stimulating for their members. CDROC’s mission statement agreed at the time was as follows:By and for board members, the objective of the Corporate Directors Roundtable of Orange County is to enhance the performance of its member directors in their business, legal, and ethical responsibilities. This objective is addressed through interactive and candid discussions among its members and with outside experts on boardroom challenges and opportunities, emerging trends, and leading practices. Eligibility for membership is by invitation only.

While the original objective has remained unchanged, the CDROC has now grown to 40 members who are all directors serving on over 100 corporate boards. The group meets quarterly as well as more frequently depending upon the members’ interests and the availability of subject mat-ter experts. There were 10 in-person sessions in 2019 covering topics such as the criticality of data, crisis management, executive compensation, emerging threats from China, corporate culture, and digital customer engagement. Three sessions were solely devoted to the board challenges and experiences of the members. The sessions in 2020 and 2021 transitioned to ZOOM given the pandemic.

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CONVERTING DATA INTO KNOWLEDGE

Categorize and prioritize the data.

Consider the implications of emerging trends and developments.

Combine trends and build scenarios of the possibilities.

Think “outside of the box” by reading extensively and asking questions.

Explore peripheral ripple effects and patterns.

Detect patterns by looking at information over time.

Source: “Spotting Trends and Patterns That Affect Your Business,” by Nina A. Bowman, HBR Guide to Thinking Strategically, Harvard Business Review Press, 2019.

Source: “Spotting Trends and Patterns That Affect Your Business,” by Nina AHBR Guide to Thinking Strategically, Harvard Business Review Press, 2

a fixed mindset will tend to exhibit inflex-ible thinking and rigid responses. Dweck suggests that people can change and most are able to move toward a growth mindset, provided they have an open mind and the right motivations.15

CRITICAL THINKING

Critical thinking is the analysis of facts to form a judgment. It is a self-diverted, self-disciplined, self-monitored, and self-corrective process of deep thinking. Critical thinking entails the ability to problem-solve and communicate as well as reflect. It is an essential trait of high-performing board members to increase their awareness.

Directors who apply critical thinking examine the facts, educate themselves about gaps in their understanding, and attempt an unbiased analysis of informa-tion, all in a rational and balanced way. Critical thinking is important because

board members are responsible for mak-ing the most significant decisions affect-ing the organization. Directors have the duty to analytically review all the relevant information and make informed and well-reasoned judgments.

In the boardroom, a critical thinker:• Assesses, then reassesses, the information.• Challenges the key assumptions.• Raises questions with clarity and

precision.• Digests abstract ideas by connecting

the dots.• Offers balanced suggestions and

recommendations.• Reasons through logic.• Tests conclusions against standards,

new information, and opposing views.• Engages with others to test the facts,

debate alternatives, and explore pos-sible solutions.

Paul Gibbons writes in Impact: 21st

Century Change Management, Behavioral Science, Digital Transformation, and the Future of Work that critical thinking is in greater demand today than ever because people are increasingly using their heads rather than their hands. As change accel-erates and automation consumes more of the work, the need for critical thinking is increasing. He notes it is paradoxical that

Directors who possess a growth mindset are better able to positively respond to circumstances that are fast changing and uncertain.

an

Dirpomi

ctors whsess a gdset are

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Source: “Spotting Trends and Patterns That Affect Your Business,” by Nina A. Bowman, HBR Guide to Thinking Strategically, Harvard Business Review Press, 2019.

FIXED MINDSET VS. GROWTH MINDSET

Source: Mindset: The New Psychology of Success, by Carol Dweck, Penguin Random House, 2016.

FixedNeed to look smart and, there-fore, a tendency to:

Avoid challenges.

Get defensive or give up easily.

Perceive effort as fruitless or worse.

Ignore negative feedback.

Feel threatened by the success of others.

GrowthDesire to learn and therefore a tendency to:

Embrace challenges.

Persist in the face of setbacks.

Emphasize effort as the path to mastery.

Learn from criticism.

Find lessons and inspiration in the success of others.

as computers do more of the thinking, the skills associated with critical think-ing are becoming even more important. Computers are capable of rote and algo-rithmic thinking, whereas the advantage of people is their ability to think differ-ently. Gibbons emphasizes that there is a high level of risk when directors and executives fail to understand enough of a subject to ask even the most basic questions. He writes that Wall Street had some of the most sophisticated comput-ers in the world at its disposal, yet the failure to think critically was among the chief causations leading to the 2008-10 financial crisis and global recession.16

Helen Lee Bouygues writes in the HBR piece “Three Simple Habits to Improve Your Critical Thinking” that critical thinking is a learned skill and says the following techniques can help to rein-force and hone it.1. Question basic assumptions. An

important step in critical thinking is to question basic assumptions. If the board is in a discussion about the long-term strategy upon which years of effort and extensive costs will be based, it is essential for directors to challenge the organization’s core beliefs. How does management know that the business will grow? What does the research suggest about the future of the market? What happens if key customers depart? What if key suppliers went out of business? The responses to these questions can help board mem-bers gain new perspectives and reshape their thinking.

2. Reason through logic. It is essen-tial for board members to pay attention to the chain of logic constructed by each argument. Is the position supported at every

level by data? Do all pieces of in-formation build on each other to produce an informed conclusion? What are the flaws in thinking?

3. Seek diversity of thinking. It is natu-ral for people to group themselves together with those who think or act like they do. However, if all direc-tors and executives think alike, their thinking becomes rigid and it is less likely that they will change their beliefs on the basis of the facts or new information. It is important for board members to seek input from third parties and collaborate with others to diversify their thinking.17

“Board members need to commit to critical thinking so that they become more aware. This often leads to more productive board discussions, better decision making, and stronger outcomes. When directors ap-proach their thinking with an open mind, they are able to move from a fixed mindset to a perspective which is more informed, well-reasoned, and comprehensive,” said John C. Siciliano, a board member of Sabre Corporation.

ACUMINATING GOOD JUDGMENT

J. Peter Scoblic writes in “Learning From the Future” from the Harvard Business Review that change and uncertainty often present new experiences with no historical context. When situations lack analogies to the past, envisioning how they will play out is uniquely chal-lenging. He refers to economist Frank Knight (1885-1972), who argued that change and uncertainty are best under-stood in contrast to risk. In situations of risk, Knight noted, the probability of particular outcomes can be reasonably calculated because similar situations have been previously experienced. But during volatile periods, only guesstimations can be used because there is no experience to gauge the most likely outcomes. In fact, Knight emphasized that even the range of potential outcomes are sometimes dif-ficult to imagine. The key in these cases is judgment. Good judgment can chart a course or strategy through change despite a lack of reference guides.18

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Scoblic suggests that good judgment relies to some degree on experience. Dur-ing periods of change and uncertainty, an historical analogy is often used to anticipate the future. He points out, however, that at the very moment when the present least resembles the past, it makes little sense to look back in time for clues about the future. During these times, experience becomes exhausted. Other sources of judgment need to be explored to sense, shape, and adapt to what is occurring.19

Directors need to apply judgment in their critical thinking and decision mak-ing. Sir Andrew Likierman, a professor at the London Business School and a board member of Time Newspapers and the Beazley Group, writes in HBR's “A Decision Must Be Made” that good judg-ment is the core of exemplary leadership. It is what enables sound choices in the absence of clear-cut data or an obvious choice. He notes that practices that are adopted, skills that are cultivated, and relationships that are built all inform the judgments that are made. Everyone in the boardroom can interpret informa-tion and form a view. What is needed, however, is good judgment, particularly in a world intoxicated with change.20

Likierman summarizes the six com-ponents of good judgment as learning, trust, experience, detachment, alterna-tives, and delivery.1. Learning – Good judgment requires

converting data into knowledge. Many rush to poor judgments be-cause they unconsciously filter the information they receive or are not sufficiently skeptical of what they see, hear, or read.

2. Trust – Most decisions are not solitary endeavors. The skills, ex-periences, and wisdom of trusted advisors are often critical inputs into the quality of judgments.

3. Experience – Experience provides context and helps identify solu-tions and anticipate challenges. Experience that is narrowly focused, however, is less than helpful. Deep experience in a particular domain

can sometimes fall into a rut by making judgments out of habit, complacency, or overconfidence.

4. Detachment – The ability to detach both intellectually and emotionally is a core feature of good judgment. But detachment is a difficult skill to master. Cognitive biases such as anchoring,21 confirmation,22 risk aversion, or excessive risk appetite are pervasive influences in the judg-

REFINEMENTS TO JUDGMENT

Source: “A Decision Must Be Made,” by Sir Andrew Likierman, Harvard Business Review, January-February 2020.

Listen attentively, read critically. Active listening, including picking up on what is not said and interpreting body language, is a valuable trait. If overwhelmed by written materials and input, focus on the information that addresses the most critical areas.

Seek diversity, not validation. Sources of trusted advice need to be cultivated and digested. The sources should include those who are willing to express what is needed rather than what is expected.

Make experience pertinent. Assess how experience has been drawn to make decisions. Start by analyzing past judgments to identify what went well and what went badly, including whether the right experience was deployed and whether the analogies made were appropriate.

Identify and then challenge biases. Understand, clarify, and accept different viewpoints. People with good judgment make sure they have processes in place to keep them aware of and challenge biases.

Question the proposed solutions. Press for clarification on information that is unclear. Question by weighing the variables on which the arguments depend. If timing is an important consideration, determine whether it is a legitimate concern.

Factor in the feasibility of execution. The feasibility of execution needs to consider what can cause possible shortcomings, delays, or failures.

ments made.5. Alternatives – Bad judgments are

sometimes made simply because the alternatives and their conse-quences are not fully assessed. This can happen for a variety of reasons, including risk aversion on the part of people supplying the information or those recommending solutions. Thoroughly exploring all options is a key to exercising good judgment.

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6. Delivery – All the right choices can be made, yet the results may be poor if good judgment is not exercised about how and by whom those decisions will be communi-cated and delivered.23

“Board members and executives need many qualities but underlying them all is good judgment. Directors not only need to remain aware of today’s opportunities and challenges, they also need to develop an ability to make the right choices. This requires clarity of thinking, diligence, and a commitment to excellence,” commented Arnold Pinkston, corporate vice presi-dent and general counsel with Edwards Lifesciences Corporation.

IMAGINING THE POSSIBLE

In a world of constant and rapid change, board members need to stretch beyond the probable and imagine the possible. Jennifer Garvey Berger and Keith John-son write in Simple Habits for Complex Times: Powerful Practices for Leaders that when faced with complex challenges in

uncertain times, many believe that if they are smart enough, work hard, or revert to best practices, they somehow will be able to find the right answer, plan for the future, and break down problems to pro-duce controllable outcomes. But what do those in the boardroom do when this is not the case? Coping with changes that are complex and interconnected requires new ways of making sense of the world to formulate the right decisions.24

Garvey Berger and Johnson note that traditional ways to problem-solve result in simple problems having one prob-able right answer. For more complicated problems, accepted algorithms sort out the best answer among the available alternatives. Uncertainty is addressed by analysis or left to the experienced hands of others. There is an assurance in the predictability. The traditional ways of problem-solving involve a suite of the routine grounded in a mindset of clarity if not outright certainty. The routines are characterized by sharp-edged questions intended to narrow

PROBLEM-SOLVING FOR COMPLEX TIMES

Source: Simple Habits for Complex Times: Powerful Practices for Leaders, by Jennifer Garvey Berger and

Keith Johnson, Stanford University Press, 2015.

Probable

Identify practical alternatives.

Align key stakeholders.

Disaggregate and optimize one piece at a time.

Decide, pilot, and roll out.

Possible

Ask different questions.

Take multiple perspectives.

See systems and experiment at the periphery.

the focus such as: What is the expected return on investment? What is the three-year strategic plan? At what cost are we willing to settle? But these kinds of questions are often constrained and limited in atypical, complex situations such as responding to rapidly changing markets or revitalizing the culture to accommodate digitalization. Fact-based views with simplistic approaches will simply not produce the right decisions in enormously messy circumstances.25

Garvey Berger and Johnson write that moving from the probable to imagining the possible requires a fundamentally different kind of ap-proach to problem-solving. Rather than disaggregating complexities into tractable pieces, it is necessary to broaden the range of possibilities by breaking out familiar patterns and applying approaches that facilitate the expansion of the options. They suggest that uncertainty cannot be solved with standard processes. It requires new habits of the mind.26

The authors map out integral steps in imagining the possible:• Ask different questions. Questions

emerge from typical patterns of thought. A problem is narrowed to find a solution. But in doing so, the solution is often constrained and made ordinary. Asking different ques-tions can help slow down the process by taking in a more complete range of data with a wider set of possible options. Examples include:

– What do I expect not to find? How can I attune to the unexpected?

– What might I be discounting or explaining away a little too quickly?

– What would happen if I changed one of my core assumptions?

• Consider multiple perspectives. No one can predict when or where the next vital idea will emerge, although an ex-pansive view of the current conditions is a start. Pushing back on the inclina-tion to believe the data presented is all the information required can open up new possibilities. Considering multi-ple perspectives can create an entirely

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new field of vision. Diversity generates more disagreement and short-term conflict, but in an uncertain environ-ment, a more expansive set of alter-natives is required. New perspectives often arise from unexpected sources. Possible approaches include:

– Take the perspective of someone who frustrates or irritates us. What might that person have to teach us?

– Seek the opinions of people beyond our comfort zone. The perspectives of retired execu-tives and board members, more junior staff, and dissatisfied customers or partners can be insightful and surprising.

– Listen to what other people have to say. We should not try to convince them to change their conclusions. We should listen to learn. If we can understand their perspective, we might find that our own conclu-sions change.

• See systems and experiment. This ap-proach is about seeing patterns of behavior and then developing and trying small safe-to-fail experiments to nudge the thinking and actions in a new direction. It is always important to obtain a wider, more systematic view of the present. Yet many have been trained and educated to exam-ine the component parts of a problem where there is an assumption of a straightforward and linear connec-tion between cause and effect. Root causes are at the center of problems. In doing these things, the broader forces at work often are overlooked. The more systems that are examined, the more experiments can be created in unexpected places to open up new possibilities. To understand systems, it is necessary to resist the urge to disaggregate problems and attempt immediate resolution. Here are some alternatives:

– We can hold opposing ideas with-out reconciling them. If it looks as though we are confronting an either/or choice, we should re-consider our narrow framing and

wonder what we are missing. – We should not waste time arguing about the best solution. Instead, choose several good but different solutions and experiment with them all in a small way.

– We should give up the hunt for the root cause and instead look to the edges of an issue for our experiments. The system’s center is most resistant to change but tinkering at the periphery can deliver outsized returns.27

Garvey Berger and Johnson write that the world is neither simple nor static. It is patterned but not predictable. In the face of new challenges, board members and executives regularly default to how they think they should act and to what seems to have worked before. Address-ing the probable is reassuring but leaves decisions and actions more open to being surprised or blindsided. Some problems do not lend themselves to rote methods, simple approaches, or sophisticated algo-rithms. These issues need to be treated differently by using new approaches to problem-solving.28

INNOVATION, NEW TECHNOLOGIES, AND DIGITALIZATION

New technologies and digitalization are enabling innovation and disrupting existing operating models. Boards and executives today are expected to consider and decide on how technologies can im-prove operational efficiencies, create new products and services, and help their or-ganizations pursue new markets. They are also expected to oversee the competitive landscape for new entrants seeking to dis-rupt their business and the industry. To meet these expectations, directors need to be aware of the most recent innova-tions and new technologies irrespective of their past experiences, pedigrees, or specializations.

“Everyone in the boardroom should have some awareness of innovations and new technologies. Adopting technology is exciting but it can be challenging and have far-reaching effects both inside and outside of the organization. While many of

the new tools are helpful, they can lead to unintended consequences so that directors and executives need to be knowledgeable and always proceed with caution,” said Timothy Wennes, the president and CEO of Santander Bank.

Corporate Board Member and Ernst & Young conducted a survey of board members about their oversight of dis-ruptive technologies. About one-half of the directors were not convinced that their boards have the right resources to navigate the oversight of disruption caused by innovation and new tech-nologies. This underscores the need for board members to step back and verify that they have the portfolio of skills and competencies necessary to serve as a value-added resource and guide for management. EY notes that the purview of directors has expanded as technol-ogy drives new opportunities and creates new threats.29

To enhance the board’s governance, EY recommends that directors embrace a learning mindset, pursue educational opportunities, spend additional time off-line with management, and seek input from third parties. This is not about making every director a technol-ogy expert but it does require enhancing the board’s awareness so that directors can ask thoughtful questions and chal-lenge management.30

“There are at least three ways in which boards can enhance their oversight of innovation and new technologies. They can: (1) Obtain a better understanding of emerging trends and the potential impacts to operating models through board educa-tion sessions; (2) ensure the integration of IT into their boardroom discussions about strategy and risk; or (3) commit additional time on the board agenda for broader discussions of disruptive technol-ogies. In many instances, boards exploit all of these possibilities,” said Greg R. Weiss, a principal with Ernst & Young.

It is no longer a boardroom secret that leading digital players are threatening incumbents and disrupting businesses. McKinsey & Company notes that com-mon board responses to address the

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changing environment include adding a new board member with digital expe-rience, sojourning to Silicon Valley for site visits, or establishing a technology committee. Valuable as these actions may be, they often do not bridge the digital literacy gaps facing many boards.

McKinsey suggests that there is a new class of problems in the boardroom in which the seasoned experience of board members in managing and monetizing traditional assets simply no longer trans-lates. Given the dynamism of digitali-zation, many directors are left feeling outmatched and often overwhelmed. 31

McKinsey recommends that boards need to move beyond an arms-length relationship with digitalization. Direc-tors need to enhance their understand-ing of new technologies and their impact on the business, and of how digital is undermining existing strategies and stimulating the need for new ones. Management needs the board to serve as a digital sparring partner when they consider investments in experimental initiatives that could reshape markets or determine whether the organization is in the right businesses for the digital age.32

“Boards do not need a cadre of digital experts but having directors who are ‘tech-curious’ can make a big difference and is what is most needed in today’s boardroom discussions,” commented Larry Taylor, a board member of Guided Compass and Novaria Aerospace Group.

In overseeing the impact of digi-talization, PricewaterhouseCoopers provides board members with the fol-lowing suggestions:• Improve the board’s digital IQ. The

board cannot oversee digitalization if they do not understand it.

• Listen to those who are charged with driving the digital strategies. The board should regularly learn from the CIO, chief digital officer, chief innovation officer, and other subject matter experts.

• Consider deep dives. Directors can become more aware about digita-lization by taking online courses, reading essays and blogs, and lis-

ADAPTING TO THE DIGITAL AGE

Source: “Adapting Your Board to the Digital Age,” by Hugo Sarrazin and Paul Willmott, McKinsey & Company, July 2016.

Close the insights gap.

Understand how digital can upend business models.

Engage frequently on strategy and risk.

Boards need some knowledge of digital to recognize breakthrough initiatives as well as identify the security and data risks.

Directors should focus on the digital fundamentals and the quality of customer experiences.

Strategic and risk oversight in the boardroom needs to match the speed of change and respond to market signals about digital shifts.

tening to podcasts. They can at-tend conferences focused on digital technologies or visit innovation centers to see how the technologies are being tested and used.

• Keep up with continuous learning. What is new today will be outdated tomor-row. Digital is not a topic that is learned once and put aside. It is dynamic. In order to keep up, directors need to commit to continuous learning.

• Ensure digital is part of the strategy. Overseeing the strategy is one of the board’s most important respon-sibilities. Because innovation, new technologies, and digitalization are integral parts of the business strategy, these topics need to be part of every boardroom discussion on strategy.33

Pablo Picasso (1881-1973), the re-

nowned painter and sculptor, notably quipped, “I am always doing that which I cannot do in order that I may learn how to do it.”

ALL OF US ARE “ENDLESS NEWBIES”

Kevin Kelly writes in The Inevitable: Understanding the 12 Technological Forces That Will Shape Our Future that life with technology is a series of accel-erating and endless upgrades. Features shift, defaults disappear, and menus morph. No matter how long you have been using a technology, the upgrades will make you into a newbie who is of-ten seen as clueless. Everyone is a newbie and we will be forever.34

Kelly emphasizes that all of us are simply trying to keep up. Most of the

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technologies that will dominate the business 30 years from now have not yet been invented, so naturally you will be a newbie to them. Because the new technology requires seemingly endless upgrades, you will remain in the newbie state. And because the cycle of obso-lescence is accelerating, you will not have time to master anything before it is displaced, so you will be fixed in the newbie mode. Endless newbie is the new default for everyone, no matter your age or experience.35

“Board members need to increase their familiarity with new technologies if they expect to govern in a way that gets them thinking beyond today’s boundaries. The constancy and speed of change have be-come the norm and the best boards will learn to engage management more fre-quently, intelligently, and persuasively on the challenges and opportunities that matter most,” said Rick Keller, the chair-man of First Foundation, Inc.

STAYING ABREAST OF CHANGE

Most directors will admit that they find it difficult staying abreast of change. The implications of change in the boardroom are varied and include the nature of the board’s engagement with management, board renewal and reskilling, the board’s operating

NEW HOLES THAT MUST BE FILLED

One day not too long ago, we (all of us) decided that we could not live another day unless we had a smartphone. A dozen years earlier this need would have dumbfounded us. Now, we get agitated if the network is slow, but before, when we were innocent, we had no thoughts of the network at all. We keep inventing new things that make new longings, new holes that must be filled.

Source: The Inevitable: Understanding the 12 Technological Forces That Will Shape Our Future, by Kevin Kelly, Penguin Random House, 2016.

model, transparency, and accountabil-ity. Some of these implications are not new and, in fact, directors have been grappling with them for some time. However, the NACD emphasizes that there is little doubt that the challenges have become much more acute and now pose urgent concerns.36

The NACD outlines five boardroom implications of change:• Implication #1 – Boards need to

engage with management on new and fast-changing drivers of strategy and risk. Change propels the board toward the need to have a deeper understanding of the operations, as change impacts how businesses are financed, managed, and deliver value to customers. Proactive engagement requires the board moving from being a monitor and overseer of the busi-ness to becoming more involved in challenging management’s thinking and serving as a partner to respond to new strategic challenges. The risk is that this engagement can spill over into micromanagement by the board or cause new tensions between board members and executives.

• Implication #2 – Boards need to ap-proach their own renewal through the lens of changing demands to ensure long-term competitive advantage. The

way in which organizations create and preserve value is changing, demanding new types of expertise and thinking tied to the organization’s strategic needs. There is a pressing demand for up-to-date expertise in digital, culture, finance, human capital, op-erations, and marketing, which leads boards to consider different types of experiences and new capabilities. The most important aspect is ensuring the right balance between expertise about emerging issues and relevant past ex-perience. Special attention is required to align the board’s recruitment with the organization’s evolving strategies and risks.

• Implication #3 – Boards need to adopt a dynamic operating model. The pace of change strains the traditional board operating model. Most board pro-cesses have changed little as new chal-lenges have proliferated. At the same time, there is concern with overload both at the board level as well as at the committee level. Board meetings are, of course, where most decisions are made but these sessions are not the only time when directors need to engage with management. What hap-pens between and outside the board and committee meetings is important. Boards need to adopt a dynamic op-

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erating model involving frequent off-line conversations between board members and executives, regular CEO updates, and interactions outside of board sessions between and among board members.

• Implication #4 – Boards need to be transparent about how they govern. Whenever an organization encounters a failure or a significant problem, one of the first questions that is asked is, “Where was the board?” This implic-itly suggests a lack of transparency into how boards have acted or failed to respond when confronted with ma-jor challenges. It also reveals concerns about the board’s level of awareness. When matters come to the public’s attention, boards can find themselves forced into a defensive posture. In-creasingly, boards need to behave as though anything they say or do will become public while maintaining the level of confidentiality required. They need to be aware that public opinion is a moving target. Those who do not stay ahead of it can find themselves accused of being myopic or dishonest. While better information is impor-tant to all stakeholders, investors and the regulators want a more nuanced understanding of the board’s value. They want to understand how boards operate, how they make decisions, and how they hold themselves account-able. All stakeholders are looking for more transparency.

• Implication #5 – Boards need to hold themselves accountable. When it comes to individual and collective board performance, accountability starts with the rigor and candor in the boardroom. Strengthening the board’s accountability requires that it has de-fined objectives and board members have a clear understanding of their responsibilities and what is expected of them. This includes expected board member behaviors. The board needs to demonstrate courage in initiating discussions with underperforming di-rectors and, when appropriate, transi-tion directors who do not add value.37

IMPLICATIONS OF CHANGE: WHAT ARE BOARDS TO DO?

Source: “Fit for the Future: An Urgent Imperative for Board Leadership,” NACD Blue Ribbon Commission, National Association of Corporate Directors, 2019.

Implication 1Need to engage proactively, deeply, and frequently on en-tirely new and fast-changing drivers of strategy and risk.

Implication 2Must approach their own renewal through the lens of shifting strategic needs to ensure long-term competitive advantage.

Implication 3Need to adopt a dynamic operating model.

Implication 4Need to enhance communications and transpar-

ency about the board's oversight.

Implication 5Must hold themselves accountable for collective and

individual board and director performance.

“The days of boards being a collec-tion of the CEO’s best friends are gone. Board members want more than to be identified as those who meet from time to time to rubber-stamp management’s decisions. Even the notion that boards be engaged once annually in overseeing the development of the strategy is now excerpted with the expectation that they become regularly involved in interpreting and adapting to change and shaping a

vision for the organization’s future. To-day, more than ever, directors need to be informed on the big issues in order to add value,” commented Julie A. Hill, a board member of Lend Lease, Anthem Inc., and Lord Abbett Family of Funds.

In a time of constant and rapid change, both opportunity and risk abound. Board members have the re-sponsibility to address change, challenge core assumptions, and help foster a cul-

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ture of exploration and experimentation. PwC suggests that directors focus on the following areas while the organization navigates through change:• Strategic planning:

– Be clear on how change aligns with the organization’s overall strategy.

– Understand the financial implica-tions of change.

– Ensure there is a comprehensive change management program in place.

– Agree on the quantitative and qualitative measures of progress and outcomes of change.

– Provide input on the timelines and milestones of change.

– Evaluate how the organization

stacks up against the competition in addressing change.

• Leadership and accountability: – Understand who is ultimately accountable for executing change initiatives.

– Assess whether the right executives are in place to lead change and whether they have the necessary ca-pabilities and the right motivations.

• Key risks: – Understand the significant risks associated with change and how they are mitigated.

– Ask about the legal and regulatory implications of change and what new or different compliance pro-grams are required.

• External stakeholders: – Gain insights on how the customer experience will change.

– Ask how stakeholders, including the regulators, will be impacted by change.

– Assess the communications plans addressing the impacts of change.

• Culture: – Understand how the tone is set by the board and management and determine whether the executives are communicating regularly and effectively with the people.

• Talent and compensation: – Assess whether new or different skills are required. Understand how management plans to up-

ROLE OF THE BOARD DURING CHANGE

Own the big pictureThe board is able to think big and help management

in deciding on the priorities. Directors can coach

management to avoid taking defensive postures in response

to change or clinging too tightly to the status quo.

Focus on the futureManagement sometimes is consumed by day-to-

day pressures. When this happens, directors can help build awareness of

the larger issues, ensuring that executives think

beyond the short term.

Convey a sense of urgency

Opportunities are time sensitive. Once goals are identified, the board can

help stimulate action.

Foster new ideas and learning

Directors can help management by being a source of new ideas and information and

encouraging management to learn from experience.

Inspire boldness (but rein in impulsiveness)

If management is reluctant to take risks on new

possibilities, the directors can emphasize the

importance of risk and reward assessments.

Champion creativityBoard members can help

management to think boldly and creatively about the future by framing change positively and challenging

existing orthodoxies.

Source: “The Role of the Board in an Age of Exponential Change,” Deloitte, 2017.

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skill existing employees or recruit subject matter experts to address talent gaps.

– Probe how change impacts the compensation and reward packages.

• Technology: – Understand how change impacts the digital strategy.

– Gain insights in how the orga-nization collects data, how the data is used, and how it protects sensitive information.38

“The board plays a critical role during pe-riods of change by weighing in and agreeing on the strategy and financial requirements, assessing the significant risks, and measuring the outcomes. The directors need to decide who owns the oversight of the change, ensure the board has the right expertise and experiences to oversee change, and agree on the number and content of the boardroom debriefings to be provided by management,” said Ted Wilm, a partner with PricewaterhouseCoopers.

Today’s environment is uniquely chal-lenging because it requires directors who have an insatiable curiosity and resilience and who are committed to maintain aware-ness on the important issues. Board over-sight is not necessarily a younger person’s game but it does require board members who have good judgment and are com-mitted to continuous learning, critical thinking, and possess a growth mindset. Directors need to incessantly work at it. Excellence does not come naturally in an era of constant and rapid change.

“In this day and age where any number of things can change in rapid succession, board members need to challenge and reinvent themselves. Continuous learning and critical thinking are important attributes for board members to stay current and remain aware,” noted Mohan Gyani, a board member of Airlinq, Inc., Digital Turbine, Inc., Kirusa Telecommunications, and Synchronoss Technologies, Inc.

Notes1. Leading Change, by John P. Kotter, Harvard

Business Review Press, 1996.

2. Ibid.

3. Ibid.

QUESTIONS DIRECTORS SHOULD ASK ABOUT REMAINING AWARE

What changes will influence the business, the industry, and the organization’s competitive position? How will the board and executives remain aware of the changes?

How will imagining the possible change afffect the discourse and depth of analysis in the boardroom?

How can the board enhance its oversight of innovation, new technologies, and digitalization?

Which resources are available to the board to keep abreast of technological trends, innovation, and disruption? How can the board obtain the right information from management that can be used to gain insights and evaluate the opportunities and risks?

Have meaningful innovation-related metrics been developed? How often does the board review these measurements?

Are there specific education topics that would enhance the board’s oversight of innovation, new technologies, and digitalization? Should the board consider experimental learning visits to digital laboratories?

Does the organization have the right talent to address the changing environment? What are the gaps and management’s plans to address the needs?

Does the board have the right mix of expertise and experience to provide for the effective oversight of change?

How can the board instill into every director the importance and need for continuous learning and critical thinking?

How can each director remain relevant in the boardroom?

4. “Managing 21st Century Political Risk,” by Condoleezza Rice and Amy Zegart, Harvard Business Review, May-June 2018.

5. “Fit for the Future: An Urgent Imperative for Board Leadership,” NACD Blue Ribbon Commission, National Association of Cor-porate Directors, 2019.

6. Ibid.

7. Ibid.

8. Ibid.

9. “Spotting Trends and Patterns That Affect Your Business,” by Nina A. Bowman, HBR Guide to Thinking Strategically, Harvard Business Review Press, 2019.

10. Ibid.

11. Ibid.

12. Mindset: The New Psychology of Success, by Carol Dweck, Penguin Random House, 2016.

24-40.indd 3924-40.indd 39 1/8/2021 4:14:46 PM1/8/2021 4:14:46 PM


13. Ibid.

14. Ibid.

15. Ibid.

16. Impact: 21st Century Change Man-agement, Behavioral Science, Digi-tal Transformation, and the Future of Work, by Paul Gibbons, Phronesis Media, 2019.

17. “3 Simple Habits to Improve Your Critical Thinking,” by Helen Lee Bouygues, Harvard Business Re-view, May 6, 2019.

18. “Learning From the Future,” by J. Peter Scoblic, Harvard Business Review, July-August 2020.

19. Ibid.

20. “The Elements of Good Judgment,” by Sir Andrew Likierman, Harvard Business Review, January-February 2020.

21. Anchoring is when an individual de-pends too heavily on an initial piece of information (considered to be the “anchor”) to make subsequent judg-ments during decision making.

22. Confirmation is the tendency to search for, interpret, favor, and

recall information which confirms or sup-ports one’s beliefs or values.

23. “The Elements of Good Judgment,” January-February 2020.

24. Simple Habits for Complex Times: Power-ful Practices for Leaders, by Jennifer Gar-vey Berger and Keith Johnson, Stanford University Press, 2015.

25. Ibid.

26. Ibid.

27. Ibid.

28. Ibid.

29. “How Boards Are Governing Disruptive Technology,” Corporate Board Member and Ernst & Young, 2019.

30. Ibid.

31. “Adapting Your Board to the Digital Age,” by Hugo Sarrazin and Paul Willmott, McK-insey & Company, July 2016.

32. Ibid.

33. “Are Your Company and Board Ready for Digital Transformation?” Global Digital IQ Survey, PricewaterhouseCoopers, 2017.

34. The Inevitable: Understanding the 12 Technological Forces That Will Shape Our Future, by Kevin Kelly, Penguin Random

House, 2016.

35. Ibid.

36. “Fit for the Future: An Urgent Imperative for Board Leadership,” 2019.

37. Ibid.

38. “The Board’s Role in Transformation Oversight,” PricewaterhouseCoopers, 2018.

DEAN A. YOOST is a board member of both MUFG Union Bank and Pacific Life Insurance Company. He also serves as an advisory committee member of American Honda Finance Corporation. He is the author of the book titled A Director’s Voyage Through Risk Management and the co-author of the book titled Navigating Information Technology in the Boardroom. He can be reached at [email protected].

MORE ON BOARD BEST PRACTICES BY DEAN YOOSTBoard Oversight of the Constancy and Speed of Change will be Dean Yoost’s fourth board-focused book for RMA. Yoost’s other books are available at RMA’s website, www.rmahq.org, and through Amazon. They are:

Illuminating Data in the Boardroom Explains the universe of data issues that confront financial institutions – from governance and privacy to data-driven transformations – and provides directors a guide for managing them.

A Director’s Voyage Through Risk Management From cybersecurity to cultural challenges to third-party risk and more, Yoost stresses the need to identify important risks and emerging threats – and to obtain the insight necessary to effectively challenge management.

Navigating IT in the Boardroom (co-written with Bernard Mathaisel) Shows how directors can elevate their game in the oversight of IT, outlining concerns and issues in the most important areas of today’s ever-changing IT world.

CLICK HERE TO EXPLORE MORE RMA-PUBLISHED TITLES.

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https://www.rmahq.org/ProductDetail.aspx?productid=685121199

https://www.rmahq.org/ProductDetail.aspx?productId=649974440


https://www.rmahq.org/books/

JOIN. ENGAGE. LEAD.

RMA DUAL RISK RATING

AN EXPERT JUDGMENT-BASED SCORECARD FOR MORE ENHANCED CREDIT RISK MANAGEMENT

Many banks use an internally developed single rating system to analyze the ability and willingness of a borrower to repay a loan. This system has proven to be a basic solution for banks, as most don’t have the resources to develop a more advanced, custom dual risk rating system.

Up until now, affordable commercial dual risk rating scorecards have not been available. RMA Dual Risk Rating offers a solution, enabling banks to evaluate both the borrower and the loan to achieve greater granularity in classifying and managing credit risk.

• Increases consistency, transparency, and objectivity in the rating process.

• Offers a more defensible method to evaluate risk as regulatory scrutiny increases.

• Enhances portfolio management by quantifying credit loss.

• Improves risk and return calculations.

• Provides additional options for CECL.

• Nonprofit

• Oil & Gas

SCORECARDS FOR 2020 INCLUDE:

Visit www.rmahq.org/dualriskrating or email us at [email protected] to learn more or schedule a demo.

OVERVIEW

ADVANTAGES OF DUAL RISK RATING: WHY ARE BANKS MOVING TO OUR DUAL RISK RATING SOLUTION?

FUTURE SCORECARDS MAY INCLUDE:

AffordableYearly subscriptions that are more cost-effective than other similar tools.

Built by bankersWe tapped into our member banks’ vast pool of knowledge while building this tool.

AdaptableWe offer flexible deployment options: RMA-hosted web-based platform or embedded in your third-party commercial lending software.

InsightComplete portfolio reports on risk concentrations and the ability to benchmark with other banks.

CRE - Construction

CRE - Income Producing

C&I Small Business and Middle Market High-Net-Worth

Individual

Public Debt Rated

General

Facility

• Hospitality

• Plus others based on RMA member feedback

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http://www.rmahq.org/dualriskrating



CR

EDIT

RIS

K/M

OD

EL R

ISK

MA

NA

GEM

ENT

THE IMPORTANCE OF QUANTITATIVE ANALYSIS AND GRANULARITY IN RISK RATING SYSTEMS:A SERIES

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EVEN IN THE BEST OF TIMES, the efficacy of a credit risk ratings systems is central to every bank’s per-formance. Put simply, a risk ratings system is key to the entire lifecycle of a loan—from decisioning, to possible sale and/or syndication, to forbearance and workout, if necessary—and to the assessment and performance of the overall portfolio.

These are not the best of times.

The COVID-19 economic crisis has put unprecedented stress on borrowers across industries and geographies. Clearly, businesses that are suffering the most from social distancing and shutdowns (restaurants, hotels, cruises) are among the most vulnerable. However, so are borrowers of any type who entered the crisis with fundamentals that compared unfavorably with competitors. When the effects of stimulus and forbearance wear off, and maybe even before, banks with granular, quantitative-focused risk ratings systems are in the best position to address troubled credits quickly and efficiently. If they have limited time and resources, they can focus on the credits with the worst ratings.

BY WILL KUTTEH

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On the other end of the ratings scale, lenders that can identify more gradations in pass credits can cherry pick the most attractive loans and borrowers from competitors, and in effect receive a premium in interest for the credit risk taken. Robust credit rating systems have the potential for significant bottom-line impact and improved shareholder value creation.Through a series of articles, The RMA Journal will highlight the importance and capabilities of risk rating systems through interviews with practitioners, case studies from financial institu-tions, and a look at RMA’s Dual Risk Ratings solution.

While risk ratings systems dif-fer greatly and can be tweaked and updated frequently to ref lect the changing economic landscape and the individual needs of an institu-tion, they share a common goal. As a 2001 article in The RMA Journal put it, that is “to estimate the credit risk of a given transaction or portfolio of transactions /assets, using the quan-tification of expected loss (EL) as the industry standard “building block.”

It is logical that better credit risk ratings lead to better credit risk man-agement. In recent years, risk ratings have been evolving—like many other grading systems or judgments, from stocks to sports—to the point of over-whelming dependence on quantitative and data-driven analyses. While there

In addition to a quantitative focus, a key element in the performance of a ratings scale is the appropriate level of granularity. Each grade should have markedly (and measurably) different risk characteristics. If the level of granularity is too small (that is, there are too few grades), the system will not be a useful decision support tool for management. For example, some banks might overuse a single pass rat-ing—let’s call it a Pass 4—where a more granular rating scale might split that overused rating into three, for example: 4+, 4, and 4-.

If you are able to divide one accept-able risk level into several tranches, you can try to take the best of those for your own institution. That level of granularity might also help in selling loans and syndications. In general, in-stitutions should avoid a system where more than 20% of loans in a portfolio fall in a single grade.

There is also the important matter of regulation. The Office of the Comp-troller of the Currency considers ac-curate classification of credit among its top supervisory priorities, and a strong risk ratings system can also increase the efficiency and effectiveness of other risk management processes. We encourage you to join us as we go deeper into the subject of risk rat-ings in the coming year. Meanwhile, consider the following resources for your institution’s own journey: O

N P

REVI

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PAG

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must always be a place for human judgment, too much of it in a risk rating system can be detrimental. For one thing, it can hurt the consistency of ratings within a bank. For example, some banks assign the responsibility for rating credit exposures to their loan officers. That is a strength, because loan officers maintain close contact with the borrowers and have access to the most timely information on them. However, their objectivity can be compromised by incentives to produce loans.

A ratings system should provide a common language for describing credit risk exposure within an orga-nization, and ideally yield the same results regardless of who is running the numbers/scorecards. In theory, that will align decisions to an insti-tution’s risk appetite. Inconsistency, meanwhile, negatively affects the ef-ficiency of approvals and pricing, and may generate disagreements between the business line and credit functions.

In cases where qualitative factors must be considered—for example, when grading the skill of the manage-ment team—their determinative value can be strengthened with clear, un-ambiguous definitions. For example, a “Strong” means the management team has served in the industry for 15+ years or more successfully, and a “Weak” means this is their first year in business.

Through a series of articles, The RMA Journal will highlight

the importance and capabilities of risk ratings systems through

interviews with practitioners, case studies from financial

institutions, and a look at RMA’s Dual Risk Rating solution.

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“Guidelines for Risk Rating Loans in the COVID-19 Period”

At a time when historic disruption is limiting the effectiveness of traditional credit assessment processes, the paper discusses methods to:• Triage loan portfolios to more readily

discern risk based on the degree of COVID-19 impact.

• Develop and use alternative informa-tion to offset lack of indicative finan-cial information.

• Set triggers to monitor deterioration of risk mitigants.

• Thoughtfully balance the output of risk ratings models with expert judgment. The Guidelines, a project of the RMA

Risk Ratings Working Group, are de-signed to augment banks’ existing credit risk grading frameworks, protocols, and internal guidelines. They are considered a living document, to be informed by new insights as the future course of CO-VID-19 becomes clearer.

RMA Dual Risk Rating

Built by RMA member banks and indus-try experts, RMA Dual Risk Rating pres-ents a cost-effective, instant-access way to implement a risk rating system with superior granularity and consistency—a crucial advantage always, and especially in these times of COVID-19.

As a flexible out-of-the-box solution powered by ACTICO platform technol-

ogy, RMA Dual Risk Rating is designed to meet any bank’s technology require-ments. It can be deployed on its own as easy-to-use cloud-based software or seamlessly integrated as part of an exist-ing loan origination system.

Moving to Dual Risk Rating: A Risk Readiness Webinar

Despite the advantages of dual risk rat-ings, the industry has been slow to adopt them due to cost and a lack of resources. But thanks to advances in data availabil-ity and technology, that is changing—and just in time to help banks meet the challenging new CECL standard. This webinar will explain dual risk ratings and

share best practices on how to deploy and get the most out of them at your institu-tion. Information on all three resources is available at rmahq.org.

WILL KUTTEH is Senior Manager of Risk Products at The Risk Management Association, overseeing the RMA Model Validation Consortium and Dual Risk Rating solution. He can be reached at [email protected].

In addition to a quantitative focus, a key element in the performance of a ratings scale is the appropriate level of GRANULARITY.

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https://www.rmahq.org/detail.aspx?id=43861

https://landing.rmahq.org/dualriskrating



TOGETHERSTRONGERTOGETHETOGETHE

THE RMA 2019-2020ANNUAL REPORT

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TABLE OF CONTENTS

OUR MESSAGE................................................................................................... 48

OUR CHAPTERS................................................................................................. 50

OUR TOP RISKS................................................................................................. 51

OUR INITIATIVES................................................................................................ 55

OUR PUBLISHING............................................................................................. 59

OUR 2019-2020 OFFICERS .................................................................... 61

OUR LOOK AHEAD........................................................................................... 64

TOGETHERSTRONGERTOGETHETOGETHERMA

RMA’S 2019-2020 ANNUAL REPORT, INCLUDING THE FINANCIAL REPORT, CAN ALSO BE FOUND ON RMA’S WEBSITE.

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https://www.rmahq.org/detail.aspx?id=7620


RMA

TOGETHERSTRONGERTOGETHETOGETHEThere have been horrific wars, deep stock market crashes, and shocking terrorist attacks in the past, but the COVID-19 pandemic and its impacts on our financial system are unprecedented. This past year the world was turned upside down, but we have all been on the same side of this pandemic fight, and our industry has played an important role.

RMA identified the novel corononavirus as a significant emerging risk in early January and engaged a Ph.D. to develop pandemic planning resources for our members. RMA was pleased to hold the first in a series of COVID-related webinars on February 11, well before the World Health Organization (WHO) officially declared the existence of the pandemic on March 11. As part of its ongoing mission to serve its members, RMA cre-ated the Coronavirus Resource Center (landing.rmahq.org/coronavirusresourcecenter) to help RMA member institutions respond to the challenges of the COVID-19 pandemic. The Coronavirus Resource Center featured a detailed crisis management planning checklist, recommended internal and external communications pro-tocols, an analysis of potential pandemic scenarios and their implications, as well as guidelines from the Centers for Disease Control (CDC), WHO, and other relevant articles focused on keeping institutions and their people safe. This Resource Center website, a series of complimentary webinars, and online versions of round tables and conferences were created so that members can continue to benefit from thought leadership and peer sharing while staying safe and honoring the restrictions necessary to recover from this crisis.

This past year has not only been difficult due to the pandemic, but also because of racial inequality and social injustice. RMA stresses the importance of diversity, equity, and inclusion (DEI) in personnel decisions and the values we encourage in employees. We are resolved to maintain open lines of communication with all our stakeholders, especially our employees, to continue learning about the impact racism can have, and how it can be countered. RMA is committed to working with our employees, the board, The RMA Foundation, coun-cils, chapters, members, and partners until we all believe RMA truly represents and reflects the principles of diversity, equity, and inclusion. To that end, we recently engaged a firm that helps companies ensure they are doing everything possible to achieve diverse, equitable, and inclusive workplaces. The firm will evaluate our work environment and our entire talent lifecycle, including hiring, policies, and practices. RMA will also be an industry leader in providing DEI education and content, including pieces in The RMA Journal on increasing access to fair banking products, and on how the industry can best mitigate the painful memories of redlining and other discrimination.

Despite the challenges that we have all endured as an industry this past year, RMA has answered the call with several leading initiatives, tools, and solutions. An area that has grown increasingly difficult for many institu-tions to staff and pay for−in any part of the business cycle−is model validation. It has been particularly chal-lenging, as travel restrictions and third-party concerns have limited access to talent that has been integral to the model validation process. We’ve recently launched the RMA Model Validation Consortium (MVC) to provide much-needed assistance to our member institutions. The MVC provides expert validation services at favorable rates and is open only to RMA member institutions.

OUR MESSAGE

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http://landing.rmahq.org/coronavirusresourcecenter


We also want to emphasize RMA’s new Dual Risk Rating product. For many years now, the larger banks with analytical staff and resources invested heavily in dual risk rating systems. It gives them more precision to price loans, contribute to the reserving methodology, and identify problem credits faster for increased moni-toring and management. The cost of implementing dual risk rating systems, however, has kept this capability out of reach for most banks. With this in mind, RMA developed the Dual Risk Rating product to fill this gap. Dual Risk Rating offers commercial banks a more sophisticated, affordable, transparent, objective, and con-sistent solution with flexible deployment options. Subscription fees are priced to be affordable to banks of any size. Dual Risk Rating integrates with existing bank technology or banks can use a secure cloud-based option. Additional benefits include standard reporting, industry benchmarks, and new scorecards.

In addition to MVC and Dual Risk Rating, and to meet the needs of our members, RMA has enhanced its grow-ing array of virtual offerings with two new delivery methods of virtual courses, demonstrating its commitment to convenient and accessible training and thought leadership throughout the COVID-19 pandemic and beyond. RMA self-directed online courses are designed to accelerate professional development for credit and lending practitioners–especially those new to the world of commercial lending–at institutions of all sizes. They cover subject matter ranging from financial statement analysis to ethical decision-making and are available either individually or in bundles.

RMA ended fiscal year 2020 with consolidated net assets of $32.6 million, with cash and investments ac-counting for 99% of total assets. Maintaining and enhancing a strong financial position will be essential as the Association pursues transformational investments that improve products and services for this and future generations of financial industry professionals.

In the pages that follow, we break down our top risks to financial institutions as determined by RMA, share accomplishments from the last year, and offer details on our pursuits in the current year.

With timely, relevant products and services and active participation across our membership, RMA stands ready to serve our members now and in the future, especially in these challenging and uncertain times. We will all get through this TOGETHER!

Thank you and stay safe!

Nancy Foster | RMA President and CEO Michael Ankrom | RMA Chair 2019-2020

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OUR CHAPTERS

Members actively participate in the RMA network of 100chapters run by RMA Associates on a volunteer basis. These chapters are integral to the organization and set us apart from other professional associations. They provide our members with opportunities in their local communities for education, training, and networking throughout all stag-es of their financial services career. Chapters are located across the U.S. and Canada as well as in financial centers in Australia, Hong Kong, and Singapore.

In fiscal 2020, RMA chapters held more than 170 in-person events with a total of over 7,800 participants; more than 40 virtual events with a total of over 2,600 participants; and 18 in-person and 12 virtual round tables with a total of over 600 participants.

7,800TOTAL EVENT PARTICIPANTS

100RMA CHAPTERS

600ROUND TABLEPARTICIPANTS


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OUR TOP RISKSAs one of its more important initiatives, the Board of the Risk Management Association has identified several key risks to the financial services industry that continue to be discussed and shared via RMA’s various communications channels and driven by the COVID-19 pandemic. The top eight risks, presented below, include:

CREDIT RISK: The conditions that the COVID-19 crisis trig-gered have specific implications for managing and mitigating credit risk. Banks have been adjusting to the new dynamics and exploring potential new approaches to the challenges caused by the pandemic. The analyses gauge the impact of the crisis on national or regional economies as a whole, the impact by sector and subsector, and specific credit-risk problems requir-ing real-time monitoring. With that in mind, RMA has offered a variety of articles on this topic, including a piece on the impact of COVID-19 on credit risk and interviews with risk executives on credit challenges during the pandemic, which appear in the June 2020 edition of The RMA Journal. In addition, Rick Buczynski, chief economist at IBISWorld, and Dev Strischek, principal, Devon Advisory Group, recorded a podcast on the topic, titled “From Expansion to Contraction: Lending and Credit Through the Business Cycle,” which addressed lending funda-mentals that matter, regardless of where we are in the credit cycle, and identified key factors that differentiate the current cycle from past downturns. As part of RMA’s Risk Readiness Webinar Series, RMA hosted several webinars on credit risk, in-cluding one on negative interest rates, which outlined practices for firms to assess and mitigate disruptions to ongoing busi-ness activity, risk management, technology, and operations in a negative interest rate environment, and another on the effect of pandemics on credit risk, which addressed how pandemics affect your financial institution’s portfolio.

TALENT/SUCCESSION MANAGEMENT: As baby boomer retirements continue to mount, banks must develop talent with the experience and expertise to guide the financial industry


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through a landscape that will only become more challenging in future years. Just as the financial industry is changing, the skill sets needed to thrive in risk management are changing too. Banks need to augment their traditional recruiting methods by tapping new and more diverse talent pools. That means, among other measures, hiring more people with the ability to construct models and employ artificial intelligence in the context of financial services−and successfully competing with tech and other industries to attract them. To do so, individual institutions and the industry must act in ways that exemplify the positive and vital role financial services play in our society, as studies show that young professionals want to work for organizations whose values they admire. RMA has taken the lead in both attracting and developing talent through efforts including its RMA Scholarship, Academic Program, and part-nerships with colleges and universities.

CYBER RISK: Cyber risk is all too real these days and this risk continues to spike with the pandemic, so it is essential that banks implement internal corporate policies that help pre-vent any fraud or cybercrime. An article in The RMA Journal, based on the collection of 40 cyber risk metrics developed by RMA’s Operational Risk Council, provided information to consider in the areas of vulnerabilities; incidents, events, and breaches; patch and account management; third parties; cyber risk awareness training and phishing exercises; and audit findings and risk ratings. RMA has also provided an RMA Journal article on cybersecurity and data privacy in the time of COVID-19, a podcast on the OCC’s Fraud Risk Management Principles, and an Industry Insider article on cybersecurity risk management principles. Finally, as part of RMA’s Risk Read-iness Webinar Series, RMA hosted a webinar on the topic, titled “Hire a Hacker?”

STRATEGIC RISK/DISRUPTION: Technology’s disruption of the ways customers have historically engaged in financial transactions presents existential threats to financial institu-tions, but also great opportunities. While some tech compa-nies develop products designed to replace traditional bank services, there has also been a trend toward bank/fintech partnerships. Through these arrangements, banks can offer customers features that would be too expensive to develop in-house, while fintechs quickly win a large group of users they would be hard-pressed to reach otherwise. Due to the conve-nience increasingly expected by customers and the number of entities entering the fray, technology is bringing about a hy-per-competitive banking environment that is likely to only get more fierce. RMA regularly provides literature and program-ming to help members innovate and alert them to the threats and opportunities presented by technology. For example, RMA

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published an Industry Insider article on how banks can lever-age AI to manage the pandemic, developed a Strategic Risk Framework, and produced a podcast on the effect of volatility and disruption on business resiliency.

GEOPOLITICAL/POLITICAL RISK: From the uncertainty caused by the trade wars and Brexit, to nuclear fears regard-ing North Korea, to protests in the global financial center of Hong Kong, geopolitical risk is a rising concern. Such threats are particularly frightening because they jeopardize not only business but our ways of life. Still, risk managers have a responsibility to think clearly about possible outcomes, and position their institutions accordingly. The RMA Journal and Industry Insider e-newsletter have provided a wealth of mate-rial providing insight into geopolitical risks and strategies for managing them. One article of note included an interview with Chris Yip of RMA on managing risk in Asia-Pacific.

THIRD-PARTY RISK MANAGEMENT: The use of third parties continues to increase as regulatory and technical de-mands on financial institutions grow. More than ever, financial institutions must ensure that third parties are guarding data and treating customers properly. As far as customers and regulators are concerned, it is the financial institution that is responsible when a third party acting on its behalf errs−whether that means a data breach, a compliance issue, or any action that might harm that financial institution’s reputation. For example, third parties provide software and systems that assist banks in meeting regulatory reporting requirements. But in some cases, this so-called regtech can be flawed and not deliver what was required by regulators. If that were to occur, the bank would be responsible. RMA provides several resources to help members strengthen their third-party risk frameworks, including regular articles in The RMA Journal and Industry Insider, the RMA Third-Party/Vendor Risk Management Round Table Steering Committee, and the RMA-published book Third-Party Risk Management: Driving Enterprise Value, by Lin-da Tuck Chapman, President, Ontala Performance Solutions.

LIBOR REPLACEMENT: It is expected that after 2021, the London Interbank Offered Rate (LIBOR) will cease as a viable benchmark reference rate for an estimated $200 trillion in U.S. dollar exposures and $370 trillion globally. Therefore, it is the view of RMA that financial institutions should already be well into their preparations for this transition. RMA has cre-ated a LIBOR Transition Resource Library to assist banks in navigating the ongoing transition away from LIBOR rates and address the major challenges that have been identified by the industry. This library is located on RMA’s website (www.rmahq.org) and includes a variety of podcasts and articles published in The RMA Journal. Also, RMA created the LIBOR Transition

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Guide, which was sent to over 2,700 chief risk officers, chief credit officers, and senior executives, and provides tips for mitigating the issues caused by the transition. ARRC Chair Tom Wipf was interviewed by RMA in a podcast interview on leading the transition from LIBOR, and a webinar was presented on the topic, titled “Leaving LIBOR.” Finally, a survey on the transition was conducted on the topic in March 2020.

CLIMATE RISK: The impact of climate change will prompt sub-stantial structural adjustments to the global economy. Such fun-damental changes will inevitably impact the balance sheet and the operations of banks, leading to both risks and opportunities. To effectively manage climate risks and protect banks from their potential impact, institutions need to integrate climate risk into their financial risk management frameworks. To help support banks in their preparations, RMA published an article in the Oc-tober 2020 edition of The RMA Journal titled “How the Financial System Can Solve the Climate Crisis — and Create Prosperity to Boot: An Interview with U.S. Rep. Sean Casten, D-Illinois,” a leading Congressional voice on how the financial industry can usher in a prosperous era fueled by clean energy. Also, as part of RMA’s Risk Readiness Webinar Series, RMA hosted a webinar on climate change management, which addresses and identifies the opportunities climate change presents to financial institu-tions and how far along institutions are in coming to terms with the impact of climate change on their portfolios.

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In fiscal 2020, RMA responded to the COVID-19 crisis by quickly pivoting to virtual peer-sharing and other events, adding new business solutions, and creating content across our many platforms that helped institutions navigate an unprecedented economic shock.

CORONAVIRUS RESOURCE CENTERIn response to the COVID-19 pandemic, RMA created a mem-bers-only Coronavirus Resource Center to aid financial institu-tions. The site included a detailed crisis management planning checklist, recommended internal and external communications protocols, and an analysis of potential pandemic scenarios and their implications. RMA also held numerous calls to help members respond to the historic challenges of the pandemic and to gauge how member instituations were managing coronavirus risks. More than 6,000 members participated on 189 calls between March and June of 2020.

INTERNAL AUDIT COUNCILIn addition to the nine councils and committees that make up RMA’s Board, RMA created an Internal Audit Council, which will support members and audit professionals with peer-sharing events, continuing education, and resources specifically designed for internal auditors. RMA held its first virtual Internal Audit Con-ference in November 2020 as part of RMA’s Annual Risk Manage-ment Virtual Conference.

OUR INITIATIVES

6,000+MEMBERS PARTICIPATED ON 189 CALLS


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VIRTUAL ROUND TABLES RMA has created a comprehensive offering of virtual round tables that make it affordable and convenient to be part of these signa-ture RMA events. These gatherings are an opportunity to engage with and learn best practices from industry peers who share your passion for knowledge and excellence. They are also a chance to be part of a like-minded community: All RMA virtual round table participants are invited to join complimentary follow-up calls that continue throughout the year. This new feature is a way to get updates on issues, measure your progress in areas covered by round tables, and reconnect with fellow practitioners.

VIRTUAL CONFERENCES Without the time and expense of a trip and a hotel stay, RMA’s Annual Risk Management Conference, its Governance, Compliance, and Operational Risk (GCOR) conference, its Securities Finance and Collateral Management Conference, and other conferences are ac-cessible with a simple click of a link. With breakout rooms, live Q&A with presenters, and even Happy Hours, RMA’s virtual conferences provide networking opportunities and interactivity to go along with actionable information.

VIRTUAL COURSES The Risk Management Association has enhanced its growing array of virtual offerings with two new delivery methods of virtual cours-es, demonstrating its commitment to convenient and accessible training and thought leadership throughout the COVID-19 pandemic and beyond.

The offerings include new self-directed online courses that allow participants to advance through the all-digital material following the pathway that best meets their needs. The self-directed courses are modularized to fit conveniently into the workday, and feature scenario/application-based learning, active decision-making, and adaptability to the needs and skill level of each user.

RMA has also introduced live online courses. Both virtual series are opportunities for financial services practitioners to enhance their skills in a highly convenient and cost-effective way, and are focused on what the learner needs to achieve to succeed in the real world.

WEBINARS RMA’s Risk Readiness Webinars in 2020 were a welcome resource for financial institutions navigating the volatility of the COVID-19 cri-sis. RMA identified the novel corononavirus as a significant emerg-ing risk in early January and engaged a Ph.D. to provide pandemic planning resources for its members. RMA was pleased to hold the

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RMA DUAL RISK RATING Built by RMA member banks and industry experts, RMA Dual Risk Rating presents a cost-effective, instant-access way to implement a risk rating system with superior granularity and consistency−a cru-cial advantage always, and especially in these times of COVID-19.

As a flexible out-of-the-box solution powered by ACTICO platform technology, RMA Dual Risk Rating is designed to meet any bank’s technology requirements. It can be deployed on its own as easy-to-use cloud-based software or seamlessly integrated as part of an existing loan origination system.

With RMA’s trusted risk rating solution, credit scoring and decision-ing is as straightforward as entering client financial data, reviewing the rating recommendation, and taking action. Users can also run reports at the client or portfolio level to quickly examine ratings concentration and migration over time.

RMA Dual Risk Rating was launched to help member banks over-come historical scorecard development, technology, and adoption barriers that have prevented them from upgrading their risk rating systems. The rating system is comprised of a highly granular master scale, six borrower scorecards, and one facility scorecard, all developed to make it easier for banks to organize and act upon rapidly changing credit risk.

first of a series of COVID-related webinars on February 11, well be-fore the World Health Organization officially declared the existence of the pandemic on March 11. This timely series addressed the many impacts of the pandemic, introducing new topics as the crisis evolved. With more than 10,000 participants, this complimentary and timely series addressed the many impacts of the pandemic, introducing new topics as the crisis evolved. Examples included:

• Pandemic Planning: Crisis Management in the Framework of Operational Risk

• With COVID-19 Spread, Cybersecurity and Data Privacy Issues Also Rise

• CARES Act – SBA Paycheck Protection Program: Basics and Beyond

• Liquidity at Community Banks in a Pandemic• Real Estate in the Time of COVID-19: A REIT Perspective

10,000+ COVID-19 WEBINAR PARTICIPANTS

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RMA MODEL VALIDATION CONSORTIUM Banks are increasingly depending on models to run their busi-ness profitably and safely−which increases the importance of the models working well. To know for certain that models are working as intended and without error, banks need these critical models validated professionally. Typically, their choice has been to hire top-level talent and conduct the validation in-house, or engage an external firm. Both options are expensive. Banks outside of larger cities are particularly challenged to attract and retain talent.

Recognizing these challenges, RMA put together a consortium of banks and model validation firms that allows both sides to benefit from efficiencies of scale. The RMA Model Validation Consortium reduces overhead expense for the banks while ensuring critical models perform as designed.

RMA WHITE PAPERS AND RISK FRAMEWORKSTapping the knowledge of its councils, RMA creates white pa-pers that address specific current and emerging issues, and risk frameworks that provide a blueprint for managing risk areas and disciplines. Recent white papers that will be important resources in 2021 include:

• “Model Risk Management for Small and Midsize Banks”

• M&A Playbook

• “Guidelines to Risk Rating Loans in the COVID-19 Period”

• “ SARS-COV-2 Principles of Workforce Return to Facilities Guide for Financial Institutions”

• “ SARS-COV-2 Recommendations for Third Parties Working from Home and Returning to Facilities”

• “ Focus on the Negatives: Banks’ Assessment of the Potential for a U.S. Negative Rates Policy - and Their Preparedness”

• “ Complementary, Not Conflicting: Securities Lending and ESG Investing Coexist”

• “The New Normal | Digital Asset Corporate Actions”

Recent RMA frameworks that will be valuable in 2021 and beyond include RMA’s:

• Cyber Risk Metrics

• Technology Risk Framework

• Emerging Risks Framework

• Reputation Risk Framework

• Operational Risk Framework

• Strategic Risk Framework

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OUR PUBLISHING

THE RMA JOURNALThe RMA Journal®, the Association’s award-winning flagship publication, is highly regarded throughout the industry. TheRMA Journal is one of the top five banking magazines in the U.S. and, for the first time in its history, RMA is now offering it in digital format only. The Journal is also available as a mobile app. It is the only U.S. publication that provides in-depth coverage of the risks and opportunities unique to the business of commercial lending, but has also recognized the need for an integrated risk management approach. The Journal’sEditorial Advisory Board, made up of 23 industry practitioners, reviews articles for accuracy and relevance and shares topics and ideas that may be important to the membership. The Journal also includes coverage of the top risks identified by the RMA board, including articles on climate risk, geopolitical risk, and LIBOR-related issues.

PODCASTSRMA continues to assist its members in advancing sound risk management principles by keeping them informed and providing them with member benefits, including education and training throughout all stages of their financial services careers, including through its podcast program. To date, RMA’s podcasts have been downloaded more than 100,000times. RMA has increased its number of podcasts from 150 in fiscal 2018-2019 to more than 200 podcasts in fiscal 2019-2020. In addition, there has been an increase in the number of annual downloads, from 40,000 in fiscal 2018-2019 to nearly 50,000 in fiscal 2019-2020. The podcasts can be heard on RMA’s website (www.rmahq.org), Google Play, iHeartRadio, iTunes, Spotify, and Stitcher.

100,000+TOTAL PODCAST DOWNLOADS

200+PODCASTS in 2019-2020


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INDUSTRY INSIDER E-NEWSLETTER The Industry Insider is a weekly e-newsletter that features the latest regulatory updates, RMA news from the various risk disciplines, and timely articles from our website’s industry news feed. Delivered every Thursday, the Insider is a great resource for staying on top of the industry and RMA events. The publication currently has 35,000 subscribers and a 32% open rate and, like The RMA Journal, also includes extensive coverage of the top risks identified by the RMA board.

BOOKS In 2020, RMA published Culture, Strategy, and Governance: A Risk Manager’s Perspective, by Joseph A. Iraci, and Illuminat-ing Data in the Boardroom, by Dean Yoost. RMA has also pub-lished Risk Appetite, Culture, and Conduct, by Joseph A. Iraci; Navigating Information Technology in the Boardroom, by Dean Yoost and Bernard F. Mathaisel; A Director’s Voyage Through Risk Management, by Dean Yoost; and Investing in Banks: Strategies and Statistics for Bankers, Directors, and Investors by Richard J. Parsons, which accompany Banking Pillars: How Banks of All Sizes Can Achieve Excellence under Basel III, by Peter W. Buerger; Perspectives on Credit Risk, Portfolio Management, and Capital: Readings from The RMA Journal, edited by Michel Araten and Joseph L. Breeden; and Realism in Lending: Plus Other Readings on Quality Credit Culture and Sound Risk Management, by P. Henry Mueller and William H. Sihler. The books are available on RMA’s website (www.rmahq.org) or Amazon (www.amazon.com).

35,000INDUSTRY INSIDER SUBSCRIBERS

32%INDUSTRY INSIDER OPEN RATE

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http://www.amazon.com




CHAIR

MICHAEL C. ANKROM, JR.

Head of Enterprise Credit and Global Banking RiskBank of America | Charlotte, N.C.

VICE CHAIR

WILLIAM BONNELL

EVP, Risk Management & Chief Risk OfficerNational Bank of Canada | Montreal, Que.

PRESIDENT AND CEO

NANCY J. FOSTERThe Risk Management Association | Philadelphia, Pa.

OUR 2019-2020 OFFICERSTOGETHERSTRONGERTOGETHETOGETHE

RMA

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DIRECTORSKEVIN P. BASTUGA Co-Founder & EVP Signature Bank | Rosemont, Ill.

JOHN L. D’ANGELO EVP & Chief Risk Officer M&T Bank | Buffalo, N.Y.

AMY WILES EVP & Chief Credit and Risk Officer NBT Bank | Norwich, N.Y.

MOHIT (MO) RAMANI EVP & Chief Business Unit Risk Officer Truist Bank | Charlotte, N.C.

JODI RICHARD Vice Chair & Chief Risk Officer U.S. Bancorp | Minneapolis, Minn.

AMANDA NORTON SEVP & Chief Risk Officer Wells Fargo & Company | San Francisco, Calif.

DANIEL D. CALLAHAN EVP & Chief Credit Officer Commerce Bancshares, Incorporated | St. Louis, Mo.

AJAI K. BAMBAWALE Group Head & Chief Risk Officer Toronto-Dominion Bank | Toronto, Ont.

BRIAN HUGHES EVP & Chief Risk Officer Discover Financial Services | Riverwoods, Ill.

PHILIPPA X. GIRLING Chief Risk Officer Varo Money | San Francisco, Calif.

DAVID P. SHEVSKY Chief Operating Officer—Ally Auto Ally Financial | Charlotte, N.C.

MICHAEL G. NASSY EVP & Chief Credit Officer FVCbank | Fairfax, Va.

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RMA COUNCIL CHAIRSCHAPTER DEVELOPMENTMATT BRYANT EVP, Credit Administration Frost Bank | San Antonio, Texas

COMMUNITY BANKJEFFREY BAJEK Chief Credit Officer Platinum Bank | Oakdale, Minn.

CREDIT RISKSETH WALLER EVP & Chief Credit Officer TIAA Bank | Jacksonville, Fla.

ENTERPRISE RISK MANAGEMENTMARK W. MIDKIFF Chief Risk Officer KeyBank | Cleveland, Ohio

GLOBAL MARKETS RISKBENJAMIN GENEK Managing Director & Chief Risk Officer Daiwa Capital Markets America, Incorporated | New York, N.Y.

LEARNING & DEVELOPMENTKEVIN D. ODEN, Ph.D. Managing Member Kevin D. Oden & Associates, LLC | San Francisco, Calif.

MID-TIER BANKSSTEPHEN W. YOSE EVP & Chief Credit Officer Great Western Bank | Sioux Falls, S.D.

OPERATIONAL RISKJOSEPH IRACI Managing Director and Head of Financial Risk Management TD Ameritrade | Jersey City, N.J.

SECURITIES LENDINGGLENN HORNER Managing Director and Chief Regulatory Officer State Street | Boston, Mass.

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Organizations need to evolve to address changing business landscapes. RMA must continue to chal-lenge itself to ensure this change can unlock productivity gains and significant competitive advantage all while delivering exceptional member experience and engagement, and this past year was no different with the advent of COVID-19.

There are a lot of uncertainties as we move into 2021. Aside from the pandemic, we had to prepare for one of the most important presidential elections in our history. But RMA was ready to support its members with the information they needed to move forward in an very unsettling political landscape. From round tables and forums to articles and white papers, RMA answered the call.

A major initiative that RMA is excited about as we move into 2021 is its involvement in diversity, equi-ty, and inclusion (DEI). RMA stresses the importance of DEI in personnel decisions and the values we encourage in employees.

With this in mind, RMA announced key additions in 2020 in several important areas to accelerate the advancement of these initiatives, its digital footprint, and the enhancement of its virtual environment.

RMA

TOGETHERSTRONGERTOGETHETOGETHEOUR LOOK AHEAD

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Jennifer Covington serves as Director of Events at RMA. She is responsible for the organization’s event and sponsorship strat-egy as well as the execution of virtual and in-person events, confer-ences, and webinars that provide opportunities for RMA members and industry partners to share knowledge and network.

Mike Dignen, Director of Membership, manages the Associ-ation’s national team of Relationship Managers (RMs) and advances efforts to develop, strengthen, and engage institutional members with the goal of helping connect them to more RMA solutions.

Monique Donahue, Director of Professional Development, is responsible for RMA’s professional development strategy and imple-mentation, including course offerings, live and virtual training capabil-ity, and all the ways RMA assesses and acknowledges the skills and competencies of RMA members.

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Kristen Kaminski is the Director of People & Culture at RMA. She is responsible for leading, managing, and driving a com-prehensive talent strategy that delivers on RMA’s vision and business goals while creating exceptional employee experiences. As the leader for all people, processes, and programs, Kristen strives to conceive and deliver innovative and creative people ideas while keeping the organization operationally sound and legally compliant.

Brian Long serves as Chief Financial Officer at RMA. His career emphasis has been on helping organizations to improve and adapt to change in a positive way. His emphasis has always been on people: developing them and creating the teams and infrastructure for the organization to succeed.

Steven Martin is the Director of Business Solutions at RMA. He is a 25+ year veteran of banking and understands what it’s like to buy, sell, create and implement bank technology. That’s the perspec-tive he brings to RMA as he looks after the RMA Business Solutions practice.

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Jamie Moculak joined RMA as Director, Demand Generation Marketing. She is responsible for the launch of a new website and re-brand project, as well as implementing new content, digital marketing, and customer engagement strategies.

John Sullivan serves as RMA’s Academic Market & Assess-ment Director. Sullivan oversees the RMA Executive Education offer-ings such as the prestigious RMA/Wharton Advanced Risk Management Program, as well as the Association’s Credit Risk Certification and other RMA Assessment and Credentialing. He also serves as the execu-tive staff liaison to the RMA Foundation, which awards scholarships to college students pursuing a career in financial services.

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COMMUNITY BANKS AND THE

PAYCHECK PROTECTION PROGRAM

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Q&A

NO MATTER HOW you look at the role of community banks in distributing the initial $669 billion in Paycheck Protec-tion Program (PPP) funds, the numbers remain staggering. A recent FDIC report (see sidebar for more details) broke down the performance by community banks a few different ways, all of them impressive:• FDIC-insured community banks held

$148 billion, or 31%, of bank-held PPP loans, compared to their 15% share of all bank loans.

• More than 75% of community banks in nearly every state and U.S. territo-ries are participating in the PPP.

• Through their participation in the PPP, community banks reported an increase in their share of small business loans to 29% from 25% one year ago.

It is undeniable that community banks played an outsized role—the operative saying became they “punched above their weight class”—in facilitating perhaps the most important U.S. government rescue program in history. Now, as we enter a new year, hopefully one that will not be as dominated by COVID-19, questions arise: What will be the legacy of PPP for community banks, and what has the program highlighted about community banks and their customers that can be instructive now and into the future?

The RMA Journal recently discussed these and other PPP-related questions with members of RMA’s Community Bank Council. These bankers looked back and looked forward, sharing what it was like to be part of PPP and how they might be able to leverage the mammoth stimu-lus program for new opportunities and lasting success. The RMA Journal inter-viewed Lexie Garrison, chief credit officer at Oklahoma City-based Valliance Bank; Frederick L. Daniels, Jr., chief credit offi-cer at Atlanta-based Citizens Trust Bank; and David P. Skidmore, internal audi-tor, First Montana Bank. Skidmore also relayed the thoughts of regional officers throughout First Montana’s footprint.

RMA JOURNAL: What is the legacy of PPP for community banks?

GARRISON: The legacy is going to be that we are just as capable as anyone to serve customers in any scenario.

DANIELS: We established that commu-nity banks are the bedrock for America’s small businesses. When our customers were in need, we immediately mobilized our banks and staffs to create a financial “lifeline” to steady their businesses. Our institutional support cut across all indus-tries, professions, and demographics as we implemented vital funding to main-tain the employment, dignity, and way of life for small businesses. We helped familiar names and faces navigate un-known PPP complexities and introduced a calm environment for most customers as the details were still being formulated.

SKIDMORE: I think the legacy for us is that while we’re already going to be there for our customers and go the extra mile when challenges arise, the PPP program also provided us with additional insight into our customers’ business operations, which will help us better meet their bor-rowing needs as future challenges arise.

RMA JOURNAL: Why were commu-nity banks able to play a leading roIe in distributing PPP loans?

SKIDMORE: Being responsive to our customers and getting them enrolled in the PPP program had a huge impact. We responded to customer and appli-cant phone calls for help with the PPP application process, and were proactive in reaching out to our customers to tell them how the program worked and what borrowers needed to provide as part of the application process. This created significant goodwill with our current customers. Many new customers were referred to FMB by accountants in the community and other business owners.

DANIELS: We are located on the main streets of our community. Our leadership roles in the community reinforced our bank’s positioning as the “go to” place for “lifeblood loans.” When you know

FDIC SUPPLIES FACTS AND FIGURES ON COMMUNITY BANKS AND PPP A recent FDIC paper highlights the outsized role community banks are known to have played in administering the Paycheck Protection Program (PPP).

Written by Margaret Hanra-han, chief of the FDIC’s Finan-cial Analysis Section Division of Insurance and Research, and Angela Hinton, a senior finan-cial analyst in the Division of Insurance and Research, the paper notes, “The PPP program filled a need for credit at a criti-cal time in our nation’s financial history, and community banks’ participation in this lending was instrumental.”

As of June 30, 2020, commu-nity banks held $148 billion of the $669 billion in PPP loans, 28% of total PPP loans and 31% of PPP loans held by banks, the paper says. That compares to the 12% of total industry assets and 15% of total industry loans held by community banks. From the vantage of second quarter 2020, the paper reports, PPP had in-creased community banks’ share of loans to small businesses to 29% from 25% in the year-earlier period.

“The Importance of Com-munity Banks in Paycheck Pro-tection Program Lending” also examines the PPP performance of community banks in terms of industry sector and geography.

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those in the community and they know you, that relationship is a strong bond. Our customers trusted us to meet their needs quickly and efficiently.

GARRISON: The heart and soul of our banks is our community. We know we have to be there for them in times of need. With staffs that wear multiple hats, flat organizational structures, and minimal red tape it was relatively easy for us to shift focus to meet the needs of our customers.

RMA JOURNAL: How can community banks translate their PPP success into opportunities moving forward?

GARRISON: Many institutions opened up their doors (figuratively speaking) to accepting PPP applications from non-borrowers. This gave many community banks the opportunity to introduce the community bank way to small businesses. The key to using the PPP for future suc-cess with existing and new customers is going to be staying as responsive to your customer as we did during the onset of the pandemic and shutdowns. If COVID has taught us anything it is to be compassion-ate, understanding, and to give everyone a little grace. The lines of communication that PPP opened up are great and we need to keep those open to be able to move

forward in the best way possible.

DANIELS: Education remains a huge hurdle for many customers and com-munities. Providing instructional infor-mation and partnering with community organizations who provide small busi-ness tactical support can help sharpen a business’ financial acumen and will open access for more opportunities for suc-cess. However, we faced too many small businesses that did not have their payroll records in order, had not talked to their accountants or legal counsel in months, and could not supply the basic informa-tion needed to qualify for a PPP loan. We cannot lose sight that there were billions of dollars that went unused, which could have provided vital support to businesses that for whatever reason could not cre-ate a successful application even though their credit or financial history were not criteria for approval.

SKIDMORE: The effort resulted in cus-tomers being very appreciative, which trans-lated to increased loyalty to First Montana Bank. Our PPP success has reaffirmed the importance of forming and sustaining strong customer relationships. A strong takeaway from the PPP program was a feeling that our bank was “there” for them, and had invested a lot of time and effort to help customers overcome obstacles with the application

process. Our Butte branch, through their hard work and customer-focused mindset working with PPP submissions, won rela-tionships with approximately 15 new busi-nesses and cemented our relationship with our existing customer base. RMA JOURNAL: Were there any downsides to PPP for community banks? If so what were they?

DANIELS: It overtaxed our human capital. We had associates working 12- to 18-hour days for nearly two months in some cases to process all of the activity. We pulled people from all bank departments and it still was not enough during the PPP peak periods. We must develop strategies to better mobilize and utilize technology to handle challenges like the ones PPP pre-sented. Given our limited size, we should also set realistic customer expectations on how quickly we can process transactions in a program like PPP.

GARRISON: The downsides to PPP have morphed throughout the process. Starting out, the largest was the uncertainty and unknowns of the program—from process, to requirements, to time frames, to cost, to balance sheet impacts for the banks. All caused stress on the institutions as a whole and the individuals within them. Currently, though, the primary downside

“WE IMMEDIATELY MOBILIZED OUR BANKS AND STAFFS TO CREATE A FINANCIAL ‘LIFELINE’ TO STEADY THEIR BUSINESSES.”

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is the uncertainty of which loans, or por-tions of loans, will not be forgiven; how the collection on the government guarantee is going to be handled; and what impact this will have on workloads and reserves.

SKIDMORE: For us, the downside of the program was the uncertainty of the application requirements, which left many borrowers confused as to how to proceed. Another downside was the sheer number of applications and the long hours required to get applications submitted via the SBA’s E-Tran system.

RMA JOURNAL: Why was it worth-while for so many community banks to put in the long hours, bring on more employees, and beef up their technological capabilities to process PPP loans?

SKIDMORE: Our hard work and long hours saved a lot of businesses in town. The Butte branch did less than139 loans total-ing $10 million. Our Butte branch market president worked about 90 hours a week for a good month, in some cases beginning at 5 a.m. and working to midnight. This helped our borrowers and greatly contributed to-ward building goodwill in the community.

GARRISON: Our success is dependent upon the success of our customers and our communities as a whole so we knew we had to do what it took. That said, the fee income was really what made all of it worthwhile for us. The fee income helped offset the additional cost as well as provided an avenue for us to increase our reserves in preparation for the COVID-related downturn.

DANIELS: The roles of banks and our customers could have easily been reversed. We could have been fighting for the bank’s survival during the pandemic. Many busi-ness owners’ backs were against the wall with nowhere else to turn. We were com-mitted to partnering as their “lifeline” so they could maintain their business and their employees’ livelihood. We were pas-sionate about creating efficient ways to

help our neighbors, community leaders, and friends. Our support was personal and is why we wake up each day happy to do our jobs. Going the extra mile and doing what was needed to ensure contin-ued employment and sustainable family income inspired our tireless commitment.

RMA JOURNAL: It has been said that PPP loans introduced many commu-nity banks to new customers—cus-tomers that might continue to bank at their institution after PPP. Have you seen any evidence that this is true?

SKIDMORE: This was well worth it because it helped so many of our cus-tomers “stay afloat” and helped them manage the financial stress that came with reduced cash flow. In the case of our Butte branch, through their hard work and customer-focused mindset working with PPP submissions, we were able to win relationships with approximately 15 new businesses while cementing our rela-tionship with our existing customer base.

DANIELS: As a result of accepting both customer and non-customer PPP appli-cations, we have numerous examples of non-customers who moved their primary checking accounts to our institution.

GARRISON: Absolutely. We had several small business customers that had actually moved their loans/relationships to other banks to take advantage of lower loan rates that we could not match. As a result, we have had customers return because of our ability to process their PPP loan. In other instances, we gained additional business from existing customers that had additional business banking elsewhere.

RMA JOURNAL: What are some ways a community bank can lever-age its PPP activity for future growth?

GARRISON: Keep communicating! Don’t let those customers forget what you can do and what you did for them.

DANIELS: We have already begun a

cross-selling program introducing our products and services to these new cus-tomers. Each customer has been assigned a relationship manager to uncover needs and provide banking solutions for their business. Successful execution of the pro-gram will add significant, sustainable non-interest income growth to our bottom line.

SKIDMORE: I think by meeting our customers’ financial needs via the PPP program, we learned a lot about their operations, which, in turn, allowed us to improve our understanding of what their future financial needs might be.

RMA JOURNAL: Did RMA help your institution figure out how to partici-pate in PPP? If so, how?

GARRISON: Yes! If it was not for the network of colleagues that I have because of RMA, I’m not sure how it would have gone. The individual relationships as well as the joint calls RMA hosted weekly [in the early weeks of the pandemic] were a sanity-saver.

DANIELS: RMA’s PPP conference calls were worth 10 times the annual member fee in 2020. The PPP consistently evolved into different iterations, almost daily, which caused confusion on how to interpret and implement the changes. The weekly calls were think tanks on both procedures and best practices. We immediately discussed internally the results of each call and imple-mented the shared ideas, documents, and newly created policies for the betterment of bank and our customers. Without RMA’s PPP support, we may have been limited to ineffective and inefficient outcomes for our employees and customers. Each conference call was well worth the time invested and the relationships built with fellow bankers from across the country.

SKIDMORE: Yes, RMA provided a variety of resources through their PPP conference calls, which allowed for the sharing of different ideas on how to ef-fectively manage the PPP program and meet our customer needs.

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MODEL PERFORMANCE MONITORING ADJUSTMENTS

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The COVID-19 panDemIC has caused unprecedented model failure and forecasting concerns across the finan-cial industry. The widespread model deterioration cannot not be easily resolved by immediate redevelopment and recalibration effort, largely due to the unavailability of the outcome data before economic recovery reaches a stable state. Banks typically resort to overlays and management adjustments to correct large forecasting variances. This attempt could introduce addition-al noise and cause model estimates to become more volatile if shocks to the model cannot be self-absorbed in time or the overlay is poorly formed. In this article, I present a framework to evalu-ate overlay necessity using existing per-formance monitoring results and other factors, and identify opportunities for performance monitoring adjustments as transitory means for response to model deterioration before more per-manent solutions can be implemented.

IntroductionModel performance ongoing monitor-ing is a standard practice at large banks as an effective way to evaluate necessity for model adjustment, redevelopment, or replacement. Appropriately selected met-rics and thresholds determine probable model break points upfront that enable timely capture of model degradation. A number of well-known changes attrib-uting to model performance breaches include, but are not limited to, model inputs, assumptions, products, expo-sures, activities, clients, or market and environment conditions. Regardless of the sources, the impact of those changes is enlarged forecasting errors and hence under- or over-prediction.

The COVID-19 pandemic has had a dramatic effect on economies across the globe and impacted the United States with unprecedented speed and sever-ity. The record swing of key economic indicators such as unemployment and GDP has triggered massive emergency So

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adjustments. Then the three key components that are essential to an effective ongoing monitoring evalu-ation are explained. A framework of leveraging performance results based upon an established monitoring plan and additional factors is provided to identify overlay necessity, with sug-gestions on how to modify current monitoring plans as an alternative means to cope with continued per-formance deterioration.

Dynamic Relationship Among Model Error, Model Risk, Ongoing Performance Monitoring, and Overlays and AdjustmentsModel risk occurs during model de-velopment and use, demonstrated by model errors before being exemplified in other forms. Fundamental errors can take place in any stage of a model build from target design, data sampling, theory application, variable selection, model estimation, and diagnostic test-ing to implementation. The presence of model errors takes various forms. A series of weak or failed hypothesis tests may suggest multicollinearity, autocorrelation, selection bias, over-fitting, etc. If not properly corrected, those errors will cause the model to produce incorrect or less accurate es-timates. Models with such errors are prone to faster deterioration and even breakdown. Application of erroneous estimates to business decision-making not only elevates model risk but, through their supporting role to the business, could also increase other risk such as credit, market, interest rate, liquidity, and so on. Model risk stem-

intervention from the government. The Federal Reserve cut the federal funds rate effectively to zero with a $700 bil-lion round of quantitative easing (QE), and numerous emergency lending pro-grams were launched. The U.S. Sen-ate unanimously passed HR 748, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 25, the largest economic stimulus in U.S. history with a $2 trillion emer-gency relief bill that attempted to arrest the financial disruption caused by CO-VID-19. Lenders also quickly reacted to the CARES Act and announced payment deferral or forbearance plans to assist customers with financial stress.

COVID-19, and the subsequent recession it triggered, is generally con-sidered by the financial industry as the leading factor of the widespread model degradation. A great deal of effort has been put in place by bankers and regu-lators to mitigate the unprecedented model deterioration, among which are identification of specific root causes and quantification of the impact at the individual model level as well as the aggregate model.

This article first discusses the dynamic relationship among model error, model risk, ongoing perfor-mance monitoring, and overlay and

ming from fundamental errors can be mitigated during the development via sample selection, data manipulation, testing alternative model specification, or applying mechanical and technical solutions, though it can never be elimi-nated. Understanding and quantifying model risk helps improve model per-formance and increase model longevity. The magnitude of such model inherent risk is a common factor of performance deterioration, and determines the speed and size of breaches.

A regression model is developed to construct relationships between target and explanatory variables using real-ized events. Put differently, we analyze the past in order to predict the future. The degree of difference between fu-ture and past is the primary reason most models degrade over time and must eventually be replaced. Properly identified metrics and thresholds cre-ate the ability to measure the difference between the current data and historical observations and subsequent timely capture of material deterioration.

Rapid advancement of machine- learning algorithms in recent years has caused the financial industry to begin adoption of alternative modeling methods that allow nonconventional pattern recognition and in-production live adjustment. Significant informa-tion technology improvement enables computing power to grow exponentially (Moore’s Law). Recent developments in cloud-based computing platforms offer the ability to process and store massive data that was not available for financial modeling five years ago. Although such progress has the potential to make a model more robust, more accurate,

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and more stable, it does not change the fact that future prediction continues to largely rely on historical experiences, nor does it significantly mitigate model risk. Therefore, performance monitor-ing becomes more important in the new era of model development.

Model overlays and adjustments are used by banks to compensate for model, data, or other known limitations. Over-lays and adjustments take different for-mats but ultimately modify model out-puts in order to minimize the forecasting variances between model estimates and actuals. Overlays and adjustments can be created along with a model’s devel-opment or during a model’s production use, when limitations and weaknesses result in material backtest errors or per-formance deterioration but the model lacks the ability to self-correct. The CO-VID-19 pandemic has resulted in greater application of overlays as a compensating factor to mitigate performance breaches.

Key Components of Ongoing MonitoringEffective model ongoing monitoring, analysis, and reporting are critical to identifying, controlling, and managing risk. A comprehensive and effective on-going monitoring includes evaluation of estimate accuracy, input and output stability, and model robustness.

The role of statistical models can be described as substantive, empirical, and indirect, even though combinations of those roles are probable in a specific ap-plication. The majority of models devel-oped and used by the financial industry are probability based, and, therefore, fall into the empirical category. Accu-racy measurement, therefore, is critical for models with a predictive nature. The smaller the variance between model estimates and the actual observations, the more accurate the model. Accuracy can be gauged by several well-known metrics such as Root Mean Square Error (RMSE), Mean Absolute Error (MAE), Mean Absolute Deviation (MAD)/ Mean Absolute Percentage Er-ror (MAPE)/Mean Absolute Percentage

Deviation (MAPD) etc. MAE is the most natural measure of the average error magnitude while the RMSE is an unambiguous measure of the average error magnitude.

A model, or equation, is “stable” if it can be applied to different time periods of data without significant loss in its prediction accuracy. A stability mea-sure evaluates if the distribution and value range of inputs and outputs have shifted over time, such as between the production data and the development sample, or between different produc-tion data. Population Stability Index (PSI) is commonly used to evaluate model stability and is also a useful tool to detect population shift due to business strategy change or shocks to the macroeconomy drivers. Coefficient re-estimation using production data is another common approach to assess model stability, which is particularly useful for models that require regular refitting with updated input data.

Model robustness analysis is also important. It ensures developers’ con-clusions hold under different assump-tions. Put differently, robustness is the model’s ability to perform effectively under internal and external distur-bances. Robustness can be viewed as a model's resilience or sensitivity given dramatic changes to model inputs. Model robustness assessment is typically performed as part of the diagnostic testing during the model development. Some statistical tests should be performed again periodi-cally during a model’s ongoing use to measure changes in model robustness.

Leveraging Performance Monitoring and Other Factors to Determine Overlay Necessity and Performance Monitoring Enhancement NeedCOVID-19 has caused many models used by banks to break in record time, casting doubt on model reliability and banks’ reliance on models when navi-gating through the crisis. Econometric models are developed with historical

data to infer relationships between the target and explanatory variables. When indicators of labor force performance and economic growth suddenly expe-rience massive divergence from recent and past trends, prevalent uncertainty will be introduced into forecasts of those variables. If such forecasts are leveraged as input variables or key assumptions by downstream models, model performance deterioration is likely to worsen as a result of reduced input data reliability. Uncertainties will also make consumers and commercial borrowers alter their behavior triggered by changes in their financial status or expectation of the economic outlook. Conventional statistical regressions and machine-learning models are los-ing credibility because they rely on the same underlying data and assumptions that fall out of the normal range with the recent economic upheaval.

Model deterioration resulting from economic shock does not necessarily mean the conceptual soundness of a model is in doubt, but does call for immediate attention to confirm the model remains viable. Large banks tend to conduct sensitivity analyses to quantify the magnitude of forecasting variance, and then leverage the analyses to form model overlays and other ad-justments, including in-model adjust-ments that directly change the value or range of the explanatory variables. The most basic sensitivity analysis typically implies estimating changes in model output by shocking individual or combined independent variables, in-cluding macroeconomic indicators and portfolio risk drivers. Model developers can also perform a more sophisticated sensitivity analysis to quantify business risk exposure change due to portfolio mix change driven by the overall out-look of market and economic condi-tions. This exercise is considered as as-sumption re-evaluation. For example, model developers can re-estimate the portfolio probability of default (PD) by increasing the percentage of high-risk applicants if anticipating higher losses

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from newly originated accounts during the pandemic. Similarly, a sensitivity analysis can be designed to help quan-tify loss magnitude changes by assum-ing higher default rates for the same underlying risk score bands.

It is generally recognized that the underlying economic theories are not fundamentally broken. Rather, their impacts based upon past empirical analyses are heavily distorted, diluted, or delayed in the presence of massive government and bank intervention to keep the economy stable. In the recent COVID-19 response, federal and state stimulus checks and generous applica-tion of forbearance programs by lenders created sustainable cash flow for obli-gors and, hence, disguise, to a certain extent, the magnitude of financial stress on borrowers. Among several attempts to address the loss of model accuracy and reliability, the most frequently sought-after approach is the application of overlays and adjustments to correct the widening forecasting errors.

Current model performance results can be used along with other factors to effectively evaluate the necessity of overlays and adjustments. The frame-work proposed in this article is trans-parent and repeatable, which can also be incorporated into the aggregate model risk assessment.

The overlay necessity evaluation framework is comprised of three fac-tors and a qualitative adjustor. The three factors are model materiality, performance monitoring results, and pre-existence of an effective overlay. The qualitative adjustor includes ad-ditional information that is likely to impact the model performance via direct dependencies or spillover effect. In other words, the evaluation stems from known facts but also incorporates a forward-looking expectation. In order to apply the framework effectively, it is important to first define materiality, which should be tied to specific busi-ness objectives such as capital planning, fraud identification, loan origination, etc. This evaluation framework can

be used as a one-time assessment or a continuous monitoring tool. The idea is depicted in the diagram above.

Overlay Necessity Evaluation FrameworkCarefully thought-out overlay and ad-justment should be accompanied with a reasonable reporting and monitoring plan to ensure timely evaluation of the effectiveness of the overlay in order to determine when to retire the adjust-ment. Limitations addressed by overlays and adjustments eventually should be incorporated into the future effort of model recalibration and redevelopment.

It is worth noting that some shocks introduced to econometric models are short lived and self-correcting. Care-less overlay application can further

worsen the model performance and increase model risk. Performance out-come evaluation becomes more critical during the epidemic. Instead of react-ing to the breaches, model developers and users should first assess if existing metrics and thresholds, and their moni-toring and reporting frequency, need to be modified to prevent overreaction to severe but transitory shocks to the model. For example, model developers and model users may need to incorpo-rate ultra-short-term metrics or change thresholds in order to manifest impact of short-term shocks to the model esti-mates. Changing monitoring frequency will not mitigate model deterioration but may offer more timely detection of model misbehavior. For example, if the state level unemployment rate is a

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model input and has been assessed on a quarterly basis, a month-over-month measure can be added to provide granu-lar information on the unemployment rate each within a quarter. Additionally, model performance with and without adjustments should be compared as well to further evaluate the overall effective-ness of model overlays and overrides.

Conclusion If the 2007–09 financial crisis raised the awareness of complexity when modeling probability of default, the COVID-19 epidemic has led to in-creased suspicion of the accuracy of econometric models’ estimates and the reliability of those models among finan-cial institutions. Before outcomes data

becomes available and enables model redevelopment, performance monitor-ing can be leveraged to evaluate overlay and adjustment necessity following the framework proposed in this article. Ad-ditionally, re-evaluation of the current monitoring plan can identify oppor-tunities for enhancements in order to more accurately capture source and magnitude of model deterioration.

The views presented in this research are solely those of the author and do not neces-sarily represent those of the Ally Financial Inc. (AFI) or any subsidiaries of AFI.

Notes1. Cox, D. Role of Models in Statistical Analysis,

Statistical Science, 1990, 5:2, pp. 169-174

LIMING BROTCKE, PHD leads the Model Validation Group at Ally. Her extensive industry financial modeling and model validation experience is enriched by a deep understanding of regulatory expectations on large bank supervision, stress testing, model risk management, etc. Prior to joining Ally, she worked at the Federal Reserve Bank of Chicago, Citi Group, and Discover Financial Services.

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RMA RISK READINESS WEBINARS

View more webinars and register now at www.rmahq.org/riskreadiness.

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RMA WHITE PAPER SHARES THIRD-PARTY RISK MANAGEMENT LESSONS LEARNED DURING COVID-19

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A new Risk MAnAgeMent AssociAtion white pApeR, "SARS-COV-2: Recommendations for Third Parties Working from Home & Returning to Facilities," shares valuable lessons learned by practitioners navigating COVID-19’s impact on the crucial relationship be-tween financial institutions and their third parties.

Every firm in every sector operates within a complex extended enterprise, with extensive reliance on third-party relationships. COVID-19 is a sharp reminder of the importance of proactive third-party risk manage-ment, which is necessary for risk treatment, risk insight, and risk governance.

In the paper, subject matter experts for third-party risk management identify risks and highlight deficien-cies in existing practices and controls. The document presents many high-impact “problem statements” and provides specific and actionable recommendations that will help professionals mitigate or treat the risks.

The level of detail provided in the paper makes it an ideal tool for third-party and operational risk manage-ment professionals, as well as business owners in the first line of defense. The paper, which is available to members at rmahq.org, is arranged into six sections:• COVID-19’s Impact on Third-Party Risk Manage-

ment Practices.• COVID-19’s Impact on Business Resilience

Strategies.• Harmonizing Practices Globally.• Contingency/Exit Plans.• Activity Concentration Risk.• Geographic Concentration Risk.

The paper was initiated by the members of the RMA Third-Party Round Table and executed by a smaller working group comprised of senior level third-party risk management practitioners and subject matter experts. Contributors included:

• Jim Berghs, SVP, Third-Party Risk Management, US Bank.

• Bob Koszkalda, Director, Third-Party Risk Manage-ment, Key Bank NA.

• Daniel Schiemel, Operational Risk - Third-Party Risk Management, Guardian Life Insurance Company.

• Christe Smith, Director of Third-Party Risk, Bank OZK.

• Linda Tuck Chapman, CEO, Third-Party Risk Institute Ltd.

The paper, which has been reviewed and endorsed by RMA’s Operational Risk Council, continues the Associa-tion’s leadership since the beginning of the pandemic on the implications of COVID-19 for third-party risk. Practi-tioners are encouraged to utilize additional RMA resources including “Third Parties - Working from Home & Returning to Facilities,” which was an addendum to the“SARS-COV-2 Principles of Workforce Return to Facilities” white paper.

Please check the March issue of The RMA Journal for an article featuring interviews with members of the Third-Party Round Table working groups. They will highlight their observations on the best practices presented in the white papers, and preview third-party papers and other work that will be released in the near future.

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SUBJECT MATTER EXPERTS FOR THIRD-PARTY RISK MANAGEMENT IDENTIFY

RISKS AND HIGHLIGHT DEFICIENCIES IN EXISTING PRACTICES AND CONTROLS

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Key Takeaways from the White Paper

Interviews with members of the RMA working group that developed the “SARS-COV-2: Recommendations for Third Parties Working from Home & Returning to Facilities” will be featured in the March edition of The RMA Journal. A preview of the group’s insights is below:

Christe Smith, Director of Third-Party Risk, Bank OZK

• “The largest takeaway from my research into the lessons learned from COVID 19 is that third-party relationship

owners need to understand that similar to managing internal employees, while employee contributions may

always be valuable, not each employee and not each third-party product or service is critical to the success of

the overall operations of the company. This oversight is not static and must be evaluated on a continual basis.

When disaster events strike, it is crucial to have the ability to manage the enterprise third-party risk from the

top down and know who the players are at a moment’s notice.”

• “Building on the knowledge for critical and material service providers is the documented inventory for in-scope

third parties. The inventory should be very detailed and easily accessible so that locations of third parties and

their critical sub-service providers, product and service descriptions, data hosting types, primary and backup

data centers locations, contracted RTOs, contact information, risk ratings, and the internal relationship manager

assigned to the third party are known. This inventory, built on the culmination of risk assessments and due

diligence evaluations, allows the TPRM function to easily dissect third-party relationships to focus on those

products and services in scope for event monitoring and activity.”

• “Ongoing monitoring is the essential ingredient for successfully managing third parties during an event. Knowing

any potential weakness within your third-party organization is a valuable tool. Participating in joint disaster

recovery exercises will have given you first-hand knowledge of your third party’s ability to successfully transi-

tion to backup sites and resume business during various event scenarios. SOC report evaluations, completed

self-assessment questionnaires, and ongoing discussions with your third party are the next best thing to being

embedded within their outsourced environment and should be updated frequently. Reviewing the data from

ongoing monitoring with your internal third-party relationship owner ties these components together and also

allows third-party risk management the ability to hear process failures, customer complaints, and other line of

business observations needed to remain fully engaged with the third-party performance capability.”

Bob Koszkalda, Director, Third-Party Risk Management, Key Bank NA (On the type of concentration risk that gets the least attention,

and how institutions could evolve their practices)

• “Activity-level concentration risk, where one third party performs a substantial amount, if not all, of an activity

for a bank, often doesn’t receive the same attention as geographic risk. It is easy to understand the potential

negative consequences of having excessive processing facilities or data centers in a location that could be impacted

by the same natural disaster such as a hurricane. They are frequently in the news. There are fewer instances of

third parties not being able to perform at all, but the impact could be just as severe.”

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The RMA Journal - February 2021 - Citizens Trust Bank

Documents

Transcript of The RMA Journal - February 2021 - Citizens Trust Bank