Let’s Be Careful Out There [RMA Journal, The]

It has been about three years since the financial crisis shook the economy, and our industry continues to operate in an uncertain environment. Yes, profitability is up at many institutions, but growth is tepid. And it is in this weak but recovering environment that we see competition nudging underwriting standards.

In its 17th annual Survey of Credit Underwriting Practices, released in June, the Office of the Comptroller of the Currency noted that underwriting standards are easing in response to competition and also to an improvement in credit market liquidity and a desire for more market share. But not at all banks. Many are making no changes, or they're continuing to tighten underwriting standards, especially in products with poor performance.

The survey does not indicate an industry heading toward trouble, but the message is clearly one of caution. Dave Wilson, the newly appointed senior deputy comptroller for bank supervision policy and chief national bank examiner, said, "Some easing of standards is normal and healthy as the economic environment stabilizes." But he also warned, "We need to remember that overly liberal underwriting standards contributed to extremely high credit losses. The pace of easing standards in products like leveraged lending is disconcerting and warrants close attention."

Wilson reminded us of what we already know but sometimes forget: that bankers need to apply sound and consistent underwriting standards, regardless of the economic cycle or whether a loan is originated with the intent to hold or sell it.

As RMA members, you know that the best protection against underwriting lapses is a well-developed risk appetite statement. That statement, which should be absorbed into your institution's culture, is the cornerstone of a robust enterprise risk management program.

Helping to lead our effort to promote enterprise risk management throughout the industry is our 2011-12 board chair, John J. Wixted Jr., chief risk officer and executive vice president, PNC Mortgage Company. In his RMA Journal interview on page 14, Jack points to underwriting standards as a top industry concern, warns that covenant-light underwriting is creeping in again in leveraged lending, and urges risk officers to focus on balancing acceptable risk/return with growth.

We're grateful to Jack for accepting the responsibilities of board chair this year. And in these challenging times for our industry, we're fortunate to be able to benefit from his considerable experience both as a regulator and a banker.

I would also like to thank our outgoing board members, especially David Coxon, our 2010-11 chair, whose long tenure with community banks gives him great insights into that critical segment of our membership. Under David's leadership, RMA strengthened its commitment to enterprise risk management by developing products such as the Risk Appetite Workbook, designed specifically for our community bank members. We will continue to focus on our small-bank members by developing products and services designed for their needs.

As we expand our mission with courses and events in Europe and Asia, you will also see articles in the Journal that present a perspective outside of North America. I think you'll find those articles of interest, regardless of your bank's asset size or location.

In closing, I want to emphasize that you must be vigilant in adhering to your bank's risk appetite as the environment becomes more competitive. As Sgt. Phil Esterhaus used to say on Hill Street Blues, "Let's be careful out there!"

Bill Githens, CRC | President and CEO

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