Create a Risk Committee? (October 2010)

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Create a Risk Committee? (October 2010)

Board Matters | By Steve Cocheo, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Debating whether BHCs under $10 billion need one

Iowa’s Bank Midwest has been beefing up corporate governance. As part of that, Chairman Mary Ellen Domeier and fellow directors reconsidered where “risk” resides.

As Domeier explains, the $584 million-asset bank to date has not had a board-level Risk Committee, yet it clearly has had a risk approach in place. Audit oversees financial controls and compliance; ALCO oversees liquidity; and the Loan Committee oversees credit risk. Traditionally it all came together at the full board.

Question was, should the bank take a page out of the Dodd-Frank Act proactively? The law imposes a risk-committee requirement on public BHCs of $10 billion or more. It empowers the Federal Reserve to impose such requirements on other public BHCs. Debate is growing regarding doing so voluntarily. For some CEOs and board members, the thought isn’t high on their list of “want to’s.”

Attorney Jeff Gerrish of Gerrish McCreary Smith, PC, has blogged his strong recommendation to adopt the structure on ababj.com. But he hasn’t been getting much traction among clients. The costs of an additional committee as well as the added time burden on already busier board members raise eyebrows, he says.

Gerrish isn’t the only proponent. Thinking this idea over “is a good exercise, and not a crazy idea,” says David Baris, executive director of the American Association of Bank Directors.

“I think this is going to get into the examination process very quickly,” says Walt Moeling of Bryan Cave LLP. Moeling happens to think the risk committee isn’t necessary for small, simple community banks, and should be reserved for more complex organizations. However, he agrees with Baris, who says, “These things have a way of filtering down to smaller institutions.”

The Audit Committee often plays host to risk considerations, but Baris points out that the key role of that body should be controls and the veracity of the bank’s financial reporting system. As a result, says Gerrish, operational and other risk can become stepchildren.

“You have different silos,” adds Baris. “But who is connecting all the dots?”

While acknowledging the worries about examiner expectations, risk management consultant Michele Lucci of Banker’s Toolbox, Inc., nevertheless thinks documentation, rather than a new committee, is the answer.

“It’s very possible that discussion like this is going on already,” explains Lucci, a former examiner, “but is not being documented in the board minutes, and therefore examiners can’t see it.”

Micromanagement represents a potential downside of increased oversight, but experts say this is a matter of keeping board and management to their own knitting. Sometimes boards receive too much undigested material. “There’s way too much data,” says Walt Moeling, “and way too little information.”

As for Bank Midwest, Domeier says for now the board believes its overall process means as much as a dedicated committee. She believes setting risk tolerances at the board level will do the job.

“Our Audit Committee will be the driver at present,” says Domeier.

What about nonfinancial risks, such as reputational risk?

Domeier suggests that boards are aware of these issues, which ultimately relate to some measurable factor. After all, none of those risks arise because things went right.

“The important thing,” she says, “is to have a Plan B.” â–

The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj1010/index.php?startid=68