Understand and challenge management’s viewpoint on changing risks and dislocations, including how potential continued rate increases and a potential ‘higher for longer’ interest rate environment could affect the bank’s strategy and objectives.
Ask management to support and explain its critical assumptions, especially in cases when they differ from the perspectives of regulators, investors, rating agencies, financial analysts and industry observers. Boards should also carefully consider how management proposes to recalibrate risk appetite as the environment changes, and in doing so, they should challenge the methodologies and metrics used to set critical limits.
Some key questions to ask include:
Has the bank established risk tolerances sufficient to capture its current and emerging risks that have now come to light?
Are those risk tolerances complemented by key risk indicators and reporting and, given current events, should they be adjusted?
Are risk acceptance decisions sufficiently governed, supported and are the implications well understood?
Does the board receive high-quality reports that convey clear, impactful insights supported by facts and analysis?
Review the details of executive management’s crisis action plans and the range of market and economic scenarios that management is considering. Evaluate the availability and adequacy of management’s crisis resiliency, specifically with respect to capital and contingency funding.
Some key questions to ask include:
Have contingency plans been appropriately tested?
Are lessons learned from those tests documented and are plans adjusted based on the results?
Has management performed multiple tabletop simulation exercises?
Are communication plans in place that consider all relevant media outlets including social media?
Obtain independent perspectives by meeting in an executive session with the Chief Risk Officer and the Chief Internal Auditor. Boards should seek the CRO’s and CIA independent perspectives on the bank’s current risk profile in relation to the board-approved risk appetite and strategy as well as the adequacy of executive management's risk management and crisis response plans.
In addition, the CRO and CIA can provide an independent evaluation of the strengths and weaknesses of the bank’s risk management capabilities given the current environment. In particular, boards should seek their evaluation of the quality of risk data, the speed with which analyses and reports can be produced, and the capabilities of crisis response talent.
Assess whether the board and the bank’s management teams have the right skills and sufficient resources. The scope and nature of the causes of the current market stress, and the scope and nature of the required response, places strain on existing key personnel on the board and in management.
Boards should determine whether they have skill gaps in areas relevant to the current stress and where they may need subject matter expertise and training. Immediate areas of focus could include capital planning, liquidity management, regulatory strategy, crisis management, financial reporting, regulatory compliance, recovery and resolution planning, and business integrations.
In performing this assessment, boards should consider whether they run the risk of being overly dependent on a single board member in one or more of these areas, which can lead to overreliance or dependency on a key person.
Further, boards should also focus on making sure that senior management, Treasury and independent risk management functions have sufficient resources and capabilities to execute their responsibilities.
Plan ahead for the post-stress environment. We believe that further regulatory requirements for banks are inevitable. To prepare, boards should:
Launch an evaluation of board practices in light of the principles outlined by global authorities.
Understand how a potential tightening of regulatory standards for banks would affect the institution. For instance, what upgrades would be needed in capital and liquidity risk management frameworks and systems? How would the bank’s talent needs change? What changes would be required for senior management and board governance? How will operations and controls need to change? What are management’s plans to address these changes?
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