Regional President Speech

SILAS KEEHN OPENING REMARKS - RISK MANAGEMENT PLANNING SEMINAR JULY 29, 1991 - PAGE 1 ON BEHALF OF THE FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL AND THE FEDERAL RESERVE BANK OF l CHICAGO, WOULD LIKE TO WELCOME YOU TO ~~RISK MANAGEMENT PLANNING SEMINAR. l /;}\'IIA,.: G--(t_ THIS SEMINAR IS ONE IN A SERIES OF MEETINGS THAT /\ THE FFIEC HAS BEEN HOLDING -- WE HAVE HELD TWO MEETINGS THUS FAR, ONE IN WASHINGTON, O.C., THE OTHER IN SAN FRANCISCO, AND LATER THIS YEAR THERE WILL BE A SIMILAR SESSION IN ATLANTA. ALL OF US WHO ARE INVOLVED IN THE FINANCIAL SERVICES INDUSTRY IN ONE CAPACITY OR ANOTHER UNDERSTAND THAT RISK IS AN UNDERLYING ELEMENT IN THE FINANCIAL PROCESS. YET UNDERSTANDING THE MANAGEMENT OF RISK IS A DIFF~~TION. GIVEN THE PASTl CURRENT AND EMERGING IN VARIOUS SEGMENTS OF THE -1 FINANCIAL INDUSTRY, SOMEHOW THE DOWNSIDE POTENTIAL OF THE RISK ISSUE HAS NOT BEEN FULLY UNDERSTOOD OR APPRECIATED. IF IT HAD BEEN, WE WOULD NOT BE HERE TODAY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE2 ENCOURAGED I O DEVELOP RISK MANAGEME POLICIES AND SYSTEMS. NCE HERE TODAY REFLECTS YOUR RECOGNITION O THE IMPORTANC AL ORGANIZATIONS, TO HAVE EFFECTIVE RISK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE3 THE IMPORTANCE OF PROPER RISK MANAGEMENT HAS ALSO BEEN RECOGNIZED BY CONGRESS. ih.>'l- AS YOU MAY BE AWARE, '&ffS' SEMINARSANg OTHERS LIK! IT ARE BEING HELD PURSUANT TO A SMALL BUT VERY IMPORTANT SECTION OF THE FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989, COMMONLY CALLED FIRREA. - WHILE FIRREA IMPACTED SEVERAL DIFFERENT ASPECTS OF THE FINANCIAL INSIII iiJON INDUSTRY, ITS IMPETUS WAS TO REACT TO THE PROBLEMS FACING THE FEDERAL SAVINGS AND LOAN INSURANCE FUND. IN ADDRESSING THE MULTI-BILLION DOLLAR BAILOUT OF THE THRIFT INDUSTRY, CONGRESS FELT IMPELLED NOT ONLY TO REACT TO THE PROBLEM BUT TO ALSO ADDRESS ITS CAUSES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE4 CONGRESS OBSERVED THAT INSTITUTIONS FAILED FOR A VARIETY OF REASONS, THE MOST COMMON BEING EXCESSIVE CREDIT LOSSES, IMPRUDENT INVESTMENTS, INTEREST RATE MISMATCHES, AND FRAUD. WHILE EACH OF THESE CAUSES MAY APPEAR QUITE DIFFERENT, CONGRESS RECOGNIZED THAT IN THE MAJORITY OF INSTANCES THE EXTENT OF PROBLEMS COULD HAVE BEEN MITIGATED IF COMPREHENSIVE AND EFFECTIVE RISK MANAGEMENT PLANNING HAD BEEN UTILIZED. ACCORDINGLY, CONGRESS MANDATED IN FIRREA THAT THE COUNCIL DEVELOP AND ADMINISTER TRAINING SEMINARS IN RISK MANAGEMENT FOR ITS EMPLOYEES AND THE EMPLOYEES OF INSURED FINANCIAL INSTITUTIONS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ~ SILAS KEEHN r ,-#- . j; ':> PAGE 5 l ~~U :1-av, ..s "- ~ JJ' ~~ I ~Ju~ a:::.,,, l. Y(HY IS THIS SEMINAR l;i.ll'JM~ &..t"'l...T 'ic::, C~ WHAT HAPPENED IN THE THRIFT INDUSTRY REPRESENTS A PAINFUL EXAMPLE OF THE EFFECTS OF INADEQUATE RISK MANAGEMENT. BUT THESE EXPERIENCES ARE NOT UNIQUE TO SAVINGS ~ o-.X'pf1'11VL/'~ AND LOANS OR PRE-1989 BANKl.tJf!· MANY ORQANl:lATIONS c- ~~,~~6£:::[5~~~~ I a.:;:;-; ?- r.n._ ;Grs : s.s,-;, ~ l..u"1 ·.0 ~ 7 "(J .. : Jt c. • _:_oc;::;~ ~ - _ ~ ~ ~ ~~NT h,~ b ,'\..( ~ .. . ~ IP (-)lu-NN• ~~ s IC:... ~O-}"'>, ~ ~ I REALIZE THAT I MAY BE "PREACHING TO THE CONVERTED'JN J;HAT THOS~~~'\BLE FOR THE; PASl __, _ ; r~.r O(c../,v~~ "--~~1JJ14., •' ABUSES ARE NOT HERE TODAYA THE N ED FOR Ai.L INSTITUTIONS TO CONTINUALLY EVALUATE AND IMPROVE THE RISK MANAGEMENT PROCESS CAN NOT BE OVER STRESSED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ~~~~ c ; ) ~ ~ ~ ~ y SILAS KEEHN . f jJ,__ -I+- n _ -~ ,._ . _.__.. ~ PAGE 6 ~ IL.J ~ .... -~- - F' ~ ~ ti::; ~ - THIS NEED IS E>JEN MORE ACUTE TODKt"' 1VITt1 "PHE PLEJHORA Olii COMPETITl\'E CHALL!NGES fl8ECIN8 iH~ J I . ~ W , ' ~ ~ 1 1 ~/u&-¥2.~ f,---fi CA- ;;:::: I l t f .I ; O ; I ~ IS ~ TR e Y t . ,..,. ~ -;1-,,,,,, n-J tz::.. ~ '<tf ~ t ~ r e1- o •• .J.~ . .FOR THIS GROUP I DO NOT NEED TO TAKE TNE TIME 10* ROLIFERATION OF NEW PRODUCT AND OVATIONS. ... _ . ~dl.~ -- ' ~c.') ~ ~ ~ (j • - - ,_ ~rJ.. ~~ ~ . . s - l,AJ"~ cJ'-'-vf <sJrr,...J. t1-t. ~/ ( ~-----------_• _ __<;:_J' _ _.. ......, THESE FACTORS HAVE RESULTED IN FINANCIAL ~ • INSTITUTIONS INCURRING NEW RISKS OR EXACERBATING - EXISTING RISKS. u4 t--r'1 --,__ ___- ~ ,:)-llwi AJ~ , /<:: ~ ~ ~ rcS'iiU Ms- .S () ,.., ~( ,n_~-€1'~ ~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE7 COMPOUNDING THIS CONCERN IS THE FACT T MANY OF THESE NEW INNOVATIONS HAVE NOT BEEN THOROUGHLY TESTED THROUGHOUT THEIR PRODUCT LIVES OR THROUGH CHANGING ECONOMIC CYCLES. I RECOGNIZE THAT ADAPTATION IS NECESSARY TO REMAIN COMPETITIVE IN A CHANGING ENVIRONMENT, IT IS AFTER ALL A DESIRABLE CONSEQUENCE OF OUR FREE MARKET ECONOMY. HOWEVER, AS FINANCIAL INSTITUTIONS RESPOND TO THEIR ENVIRONMENTAL CHALLENGES, IT IS ESSENTIAL THAT JN=el\j~ PROCEED WITH A FULL UNDERSTANDING OF THE ASSOCIATED RISKS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGES / ) WE HAVE ALL WITNESSED EXAMPLES OF INSTITUTIONS / PURSUING,·THE "HOT PRODUCT" OE-THE MOMENT ONLY TO /' ,/ // \i SUFF~R CONSIDERABLE ~J)SSES AS J'"HEY DIS .• • ./ I .• • ,/ ! THEY DID NOT FULLY UNDERSTAND TH ODUCTS RISK ,,'" ..__.,,,,. !,_...,. CHARACTERISTICS. WHAT WE HOPE TO ACCOMPLISH IN THIS SEMINAR 4 ,,{< ;$ crvv(&',J ()On THE PURPOSE OF THIS SEMINAR IS NOT TO TRY TO AVOID ALL RISKS. Af:..L BUSINESS Dl!!CISl5119 AND HOU Bl!CISIONS _ ,eve ar ,EQB Il=IAif fjj(I I Ert IISIVI SOME AM0111•T RISK. THE FINANCIAL SERVICES INDUSTRY IS, AFTER ALL, BY ITS VERY I\ k'Y NATURE THE BUSINESS OF RISK TAKING. V--/v-rl--t ,' ~ u..L~ • ./L ,,q li 55 ocooA--tiii' - a:.c:.:J tt::;..,r ~••?o-....r ~~....-T ~ rJtijj_ (yv-/CB_ d:11 ~--- ~C1"~ ~ ~ ~ ti /l,.,t 'S /~ tl:.t, ~~ ~~~~ ~p~s&/rJ tJ:p _..j o4 •,./I ~ ~ C. S: Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE 9 /.. .... _ ; ~ ~ ~~ _ INSTliAg, TMli PIJRPO&i OF THIS SEMINAR l!j-70 ASSIST YOU IN IDENTIFYING THE RISKS THAT YOU INCUR, TO MANAGE THESE RISKS ONCE IDENTIFIED, AND TO DEVELOP PRICING ~.-~ ~~ STRATEGIES WHICH APPROPRIATELY INCORPOBtffE THE RISKS INCURRED. T MEET THIS OBJECTIVE, THE COUNCIL HAS ASSEMBLED A DI GUISHED GROUP 0 ULATORY AGENCIES. THE SPEAKERS THROUGH THIS S ~WILL GAIN A PERSPECTIVE ON I ANAGEMENT (OCESS AS WE HT ON SPECIFIC RIS . Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 'q ,= c( ~- ,._fL ~ Q-G/2 cruf c;'.s b ~ ~ ~ ~ SILAS KEEHN t u.n.lf PAGE 10 o-(lU/c-41.J ~ ~ ~ T ~ - ~ FROM A MACRO PERSPECTIVE,EDWAAD WILLIAMS WILL PROVIDE AN OVERVIEW OF THE ENTIRE RISK MANAGEMENT PROCESS, INCLUDING THE USE OF RISK MATRICES AS A (~ l;fJ TOOL IN THIS PROCESS. HAS BEEN A PIONEER IN THE ~-~ USE OF RISl< MATRICES TO IDENTIFY THE TYPES OF RISKS t ASSOCIATED WITH DIFFERENT BANK PBOl?YOf9. ~ U' \7' .e .,S ~ - DAN BORGE WILL EXPAND ON THIS TOPIC BY DISCUSSING THE OBJECTIVES OF RISK/RETURN ANALYSIS. AS P! 1 ! ■iJfO T~LIEfl, flsFLif11f I RM-THE ABILITY OF FINANCIAL INSTITUTIONS TO ACCURATELY ESTIMATE RISK-ADJUSTED RETURNS IS ONE OF THE CRITICAL ISSUES FACING THE INDUSTRY. ~EXTENSIVE EXPERIENCE IN THIS AREA SHOULD PROVIDE A GREAT DEAL OF INSIGHT INTO THIS MOST DIFFICULT ANALYSIS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE 11 CHARGED WITH DISCUSSING 2 OF THE MOST SIGNIFICANT RISKS FACING FINANCIAL INSTITUTIONS ARE DAVID MAGEE, ~ WHO WILL DISCUSS INTEREST RATE RISK USING MONTE -:r:""" CARLO SIMULATION AND JAMES LAVELLE WHO WILL DISCUSS THE COMPONENTS OF CREDIT RISK MANAGEMENT. WHILE WE ARE CURRENTLY IN A RELATIVELY STABLE INTEREST RATE ENVIRONMENT, THE VOLATILITY OF RATES OVER THE PAST 2 DECADES CLEARLY INDICATES THE NEED TO PROPERLY IDENTIFY AND CONTROL AN INSTITUTION'S SENSITIVITY TO THIS SIGNIFICANT VARIABLE. EQUALLY IMPORTANT TO A FINANCIAL INSTITUTION'S VIABILITY IS ITS ABILITY TO CONTROL CREDIT RISK. WHILE CREDIT RISK MAY BE ONE OF THE MOST EASILY IDENTIFIABLE RISKS, IT IS OFTEN ONE OF THE HARDEST TO CONTROL. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE12 TH'S NE~ EARL LECTED IN THE P ULAR PR,SS, AS i~~M'S TO D ~STRATE TH1C TINUl1!G j EFF CTS OF POjR_UNDER~~ITI\ STANDA~DS. \ 1 l~ \ li ;.V ' ,.,. . . / \ \, i ; ' .. ,,~ ', .. ,,, /' ~ 1 JAMES TAKES \Js~GH THE ,STER~ NECESSAR"N:g \ \ : / I '"'- ; ' \ j : ----- ESTABtlSH THE PROPER CREDII-!CULTURE FROM LOAN \ I \.. / APPROVAL TO LOAN'REVIEW, INCLUDING A DISCUSSION ON \_; ,_ _ _ THE POSSIBLE, BUT NOT DESIRABLE, WORKOUT SITUATION. TURNING FROM SPECIFIC RISK IDENTIFICATION, THE SEMINAR ADDRESSES THE THORNY BUT EXTREMELY IMPORTANT TOPIC OF COMPENSATION. DAVID PARTRIDGE AND DAVID CATES WILL DISCUSS THE NEED FOR RECOGNIZING RISK MANAGEMENT ISSUES IN COMPENSATION SYSTEMS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE13 BVIOUSLY, COMPENSATION NSIDERATION REPRES NT A ENT OF ISIO E DIFV SE / UATELY C BUT ERSE INCENTIV - ~~ --· GEORGE KAUFMAN WILL PROVIDE THE ACA~~ ,I, wt ~ PERSPECTIVE ON EARLY INTERVENTION AN'b CLOSUR~ AS YOU ARE AWARE THIS SUBJECT HAS FAR REACHING IMPLICATIONS, FROM BOTH AN INDUSTRY AND REGULATORY S. ~ - ' ~ ~ PERSPECTIVE. - ~ ~~ ~ O'l--l B~t<:,}uS ~ . TO END THE SEMINAR, JOE CLEAVER WILL MODERATE A PANEL DISCUSSION OF REPRESENTATIVES FROM THE OFFICE OF THE COMPTROLLER OF THE CURRENCY, OFFICE OF THRIFT SUPERVISION AND THE FEDERAL RESERVE BANK OF CHICAGO. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE14 THESE INDIVIDUALS WILL PROVIDE THE REGULATORY PERSPECTIVE ON RISK MANAGEMENT SYSTEMS, INSTITUTING AN EFFECTIVE RISK MANAGEMENT SYSTEM WITH LIMITED RESOURCES, AND NEW REGULATORY INITIATIVES THAT PROMOTE BETTER RISK MANAGEMENT. INVOLVE THE ENTIRE TEAM WHILE YOU LISTEN TO THESE DIFFERENT SPEAKERS I WOULD LIKE YOU TO REMEMBER THAT THE RISK MANAGEMENT PROCESS IS NOT LIMITED TO A SINGLE INDIVIDUAL OR DEPARTMENT, BUT IS THE RESPONSIBILITY OF THE ENTIRE ORGANIZATION. ACCORDINGLY, WHEN YOU LEAVE THIS SEMINAR TOMORROW I WOULD ENCOURAGE YOU TO TRAIN AND INVOLVE ALL OF YOUR OFFICERS AND EMPLOYEES IN THE RISK MANAGEMENT PLANNING PROCESS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE15 OF PARTICULAR IMPORTANCE, IS THE NEED TO INVOLVE THE BOARD OF DIRECTORS IN THIS PROCESS. WITH INVOLVED AND THOROUGH OVERSIGHT, THE BOARD OF DIRECTORS CAN BE ONE OF THE MOST EFFECTIVE COMPONENTS. IMPORTANCE OF TOP OFFICERS WHILE IT IS ESSENTIAL TO INCLUDE THE ENTIRE ORGANIZATION IN THE RISK MANAGEMENT PROCESS, THE RESPONSIBILITY FOR THIS PROCESS RESTS WITH THE CHIEF EXECUTIVE OFFICER. THIS POSITION HAS THE POWER AND AUTHORITY TO BRING ALL ELEMENTS OF THE PROCESS TOGETHER AND ENFORCE THEIR ADHERENCE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE16 IF THE CHIEF EXECUTIVE OFFICER LACKS THE PROPER COMMITMENT, THE EFFECTIVENESS OF THE ENTIRE PROCESS DIMINISHES. THE FUTURE WHILE BAD NEWS IN THE FINANCIAL INSTITUTION l~RY HAS BEEN MORE THE NORM THEN THE EXC . THERE ARE SOME SIGNS THAT THE IRONMENT MAY BE IMPROVING. / ,/ BARRING A MUCH MORE NEGATIVE ECONOMIC / ENVIRONMEN~THAN GENERALLY EXPECTED, THE / DETERl,,ATION IN ASSET QUALITY SHOULD SOON BEGIN TO MODERATE. ~~- ~~~ / } _ ~ ~ - l ~ . ~ ~ r cAJJ-y? 1'9--r- UJ.,v ~~ ~ ~ c.-..-d - _(s-' ~ p J ~ Digitized for FRASER https://fraser.st-lo-u-is-fe-d-.o-rg Federal Reserve Bank of St. Louis SILAS KEEHN PAGE17 THOSE INSTITUTIONS WHICH ESCAPED THE RE ECONOMIC DOWNTURNS HAVE, FOR THE M ST PART, CONTINUED TO REPORT HEALTHY EARNI GS. AND WHILE SOME INSTITUTIONS ARE OPERATING AT I DANGEROUSLY LOW CAPITAL LEVELS, CAPITAL RATIOS FOR II THE VAST MAJORITY OF INSTITUTIONS IN THE INDUSTRY I I APPEAR TO BE INCREASING. /' / I ./ / I // / ,./ THESE FAVORABLE1EVENTS, HOWEVER, DO NOT LESSEN THE / IMPORTANCE O,F THE SKILLS YOU ARE GOING TO LEARN OR I I ENHANCE AT1THIS SEMINAR. I BANKl~WILL CONTINUE TO BE A DIFFICULT INDUSTRY IN ~ ONLY THE STRONG AND INTELLIGENT WILL SURVIVE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN PAGE18 HOWEVER, THE GOAL SHOULD BE MORE T FOR DEPOSITORY INSTITUTION'S TO CONTINUE TO BE KEY ./' ,/ PLAYERS IN THE FINANCIAL SERVICES INDUSTRY, ,/ COMPREHENSIVE AND EF~ECTIVE RISK MANAGEMENT ,,,.,· PLANNING IS A NECESSITY. INSTITUTIONS WHICH CAN CONTROL RISK AND DEVELOP PRICING STRATEGIES WHICH APPROPRIATELY INCORPORATE THE RISKS .INCURRED, SHOULD FLOURISH IN THE TRYING TIMES AHEAD. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1991, July 28). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19910729_silas_keehn

@misc{wtfs_regional_speeche_19910729_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1991},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19910729_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}