Banks Can No Longer Leave Policy Risks to Chance
By Karen Shaw Petrou
Bank holding companies over $50 billion were already staggering under the weight of the Federal Reserve Board’s tough stress tests, but the load just got heavier. In its August statement of “supervisory expectations,” the Fed demands that big BHCs not only show how they will handle credit risk over the next nine quarters, but now also how they will handle reputational, strategic, and compliance risk and how they account for it in their capital equation. This is good news from a policy perspective: the stress tests since 2009 have been dangerously blind to risks other than credit risk. However, most BHCs have viewed reputational, strategic and compliance risks as acts of God, suffering them instead of managing them proactively like all the other risks to which banks are heir. That’s no longer good enough, at least not if you want to pay dividends in 2014.