Effective risk management is becoming increasingly important for regional banks in order to protect their business and customers’ savings. With the Federal Reserve and other regulatory bodies taking measures to stop risky lending within the banking industry, regional banks also need to follow suit by controlling the risks in their operations.
Regional banks are financial institutions that offer banking services to customers within a certain geographic area. They offer services like checking and savings accounts, loans, mortgages, investments, and all sorts of other financial services. They often focus on serving their local communities thus, they are more involved in their communities than larger, national banks.
Risk management for regional banks is like a guard rail on a mountain road. It’s there to protect you from dangerous drops and unseen obstacles. If you ignore the guard rail and veer off course, you could wind up in a dangerous situation.
Risk management for regional banks is there to protect the bank from unexpected losses. With professional recruiting firms like Risk Talent, you can rest assured to have access to qualified individuals that understand the complexities of risk management in the banking industry and can protect you from falling off track.
In this blog, we’ll discuss risk management for regional banks. We’ll cover the recent risk issues affecting regional banks and how you can protect your bank from these issues.
Current Industry Trends
As regional banks are adapting to the digital age, it’s important to understand the current industry trends and how they can affect risk management.
With the increase in digitalization, cybersecurity risks have also risen. According to a report by the Identity Theft Resource Center, there were 1,774 data breaches in the U.S. in 2022. Sectors like healthcare, finance, and telecommunications were the most attacked, impacting millions of Americans throughout the year.
The growing competition and need for innovation is another important trend that regional banks must be aware of. With tech giants like Apple, Google, and Amazon entering the financial services industry, regional banks must also offer their customers innovative services and products to stay relevant.
The regulatory environment for regional banks is constantly changing, which means that banks must stay up-to-date on ever-changing compliance requirements. This can be a challenge, as regional banks often lack the resources to keep up with the latest regulations.
Failure to comply with regulations can lead to huge fines and other penalties. Thus regional banks must have comprehensive risk management programs that oversee the dynamic banking regulatory environment.
Recent Issues with Regional Banks in the U.S.
One notable example of recent issues with a regional bank is Capital One’s class action lawsuit that saw it pay out $190 million in 2021 to affected customers when it suffered a gigantic data breach.
Capital One was initially hacked by a former Amazon Web Services employee, Paige Thompson. She exploited a cloud firewall configuration vulnerability to gain access to data from over 100 million customer accounts.
Another example of a business in the financial sector that suffered from risk management problems is CashApp. In April 2022, a former CashApp employee downloaded the information of over 8 million users. This was a result of a weak access control policy, as an ex-employee was never supposed to be able to gain access to an organization’s systems.
The COVID-19 pandemic also had a significant impact on regional banks as many banks are struggling to stay afloat due to loan losses, reduced income, and other risks. According to a McKinsey post-COVID industry report, external fraud and technology risks are on the rise as more people work from home.
The failure of Silicon Valley Bank (SVB) is a prime example of why risk management must be taken seriously. Despite its tremendous growth between 2019 and 2022, which resulted in it having a significant amount of assets and deposits, SVB made risky investments in treasury bonds totaling over $91 billion.
When the Federal Reserve increased interest rates and the value of these investments declined, SVB was left exposed and unable to cover the large withdrawals from customers. Furthermore, the Bay Area regional bank was not subject to the extra rules and oversight required of banks with more than $50 billion in assets, due to the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act that raised the threshold to $250 billion.
These missteps are what led to the bank’s failure. If Silicon Valley Bank had managed its risks better, it could have avoided this disaster.
How Risk Management is Being Handled
The role of risk management in regional banks is to identify, assess and mitigate risks.
Employees in risk management teams work to ensure that the bank’s policies and procedures are in line with regulations and that its operations are secure and efficient. They are skilled in different types of risks, including credit, market, business, and operational risks.
To ensure effective risk management, banks need to have a good understanding of their risks and develop strategies to manage them. Some of the best practices for effective risk management include the following:
- Establishing clear risk policies and procedures
- Setting up a risk assessment system
- Implementing risk control and monitoring systems
- Developing a culture of risk management
In addition, technology and data analytics can be used to enhance risk management for regional banks. For example, banks can use artificial intelligence (AI) and machine learning (ML) to identify patterns in customer data and detect anomalies that may indicate a potential risk. Banks can also use predictive analytics to anticipate future risks and plan accordingly.
Regional Banking Issues Requiring Focus on Risk Management
The banking sector has experienced many issues recently that require a focus on risk management. Below are some examples of the most pressing risks regional banks face.
Loan Defaults and Credit Risk
Loan defaults are one of the most common risks regional banks face. When a borrower doesn’t pay back their loan, it can leave the bank in a tough spot. To prevent this from happening, regional banks need to make sure borrowers can pay back loans, and have enough collateral in case they can’t.
Cybersecurity Breaches and Fraud
With digital banking on the rise and our growing reliance on technology, regional banks are facing a big risk of cyber-attacks and fraud. Cybersecurity breaches often lead to big losses, reputational damage, and complicated legal issues.
To reduce this risk, regional banks must invest in robust cybersecurity protocols and systems.
ALSO READ: Top Tips for Successful CyberSecurity Recruitment and Retention
Operational Risk and Internal Controls
Operational risk is the risk of losses due to subpar or ineffective internal processes, systems, or staff. This includes risks related to errors in data entry, human error, and system failures. To reduce operational risks, regional banks should implement and enforce strong internal controls, such as policies and procedures related to data security, compliance, and customer service.
The Importance of Risk Management For Regional Banks
The importance of risk management for regional banks cannot be understated. Risk management helps regional banks identify and manage their financial exposures. By managing these exposures, they can reduce the potential for losses from unexpected events and maintain financial stability.
Risk management is an ongoing process that requires regular monitoring and adjustments. Thus, regional banks need to prioritize risk management and continue to adapt their systems to evolving risk requirements.
Reduce Risk Now With Risk Talent Associates
It’s clear that risk management for regional banks is an important and pressing issue. The risks that come with running a regional bank are substantial, and ignoring the warning signs can be detrimental
Identifying risk indicators so you can manage them effectively is important, however, it’s more vital to have a formidable risk management team that has the expertise to protect your bank at all times – that’s where Risk Talent Associates comes in!
Risk Talent Associates is a recruiting and executive search firm that specializes in helping organizations hire the best talent in risk management, compliance, and cybersecurity. With more than two decades of experience, we have an extensive network of talent that enables us to fill risk-related jobs with the right professionals.
Whether you need a talented professional to strengthen your organization’s risk management capacity or you’re looking to build a fortified risk management team for a new branch, we can help you.
Contact us to discover how you can get the right individuals for your risk management needs!