What’s a Risk Expert?
Public company boards have long been required to have a financial expert serve on their audit committees, or to disclose why they don’t have one, and the definition of a financial expert is well defined. But what’s a risk expert, and does a bank’s board need one? That is less clear.
The Federal Deposit Insurance Corp. on Oct. 11 published proposed guidance in the Federal Register to require banks of at least $10 billion in assets to have a risk committee with at least one member “experienced in managing the risks of a firm commensurate with the size, business model, complexity and risk profile of the covered institution to ensure that the Committee has the necessary expertise to fulfill its obligations.” That doesn’t exactly nail it down.
Community banks that stick to plain vanilla loans and deposits may not need a director with formalized risk management experience. Larger and more complex institutions, however, should have someone with specific skill sets in risk management, says John Olert, the former group chief risk officer for the credit ratings and research firm Fitch Group.
But few large banks possess that experience within their board’s membership. With others at his new consulting firm Continental Insights, Olert published a report in August that analyzed the backgrounds of the directors of the 15 largest bank holding companies in the nation and found an average of 3.7 years combined enterprise risk management experience. At Silicon Valley Bank and First Republic Bank, which failed in the spring, the researchers found no one with the type of risk management expertise they were looking for — someone who had served as a chief risk officer, economist, credit officer, or in a market risk or financial oversight role, such as at a credit rating agency.
In general, the risk committee is “dominated by members that have very impressive executive management experience but show a deficit in direct experience in finance and risk management that should be required for these critical oversight functions,” the researchers wrote. A venture capitalist or a portfolio manager, for example, may have taken risks in their careers, but someone with risk management experience has the background to challenge management on risk limits, asking whether those limits are appropriate and how growth and different activities will influence bank balance sheets.
CEOs sometimes don’t have that risk management experience and are likely to delegate that to other senior officers. “It’s not that these people aren’t very accomplished, but they’re accomplished in things that don’t relate to the risk,” Olert says.
• Naomi Snyder, editor-in-chief for Bank Director