A recent survey of risk management professionals identified “regulatory overload” as their topmost concern. This finding comes as no surprise after a half-decade long profusion of regulatory requirements. Burgeoning compliance requirements have created unprecedented risk-related accountability across the entire lease lifecycle.
The overall objective of the regulatory framework is to ensure that institutional credit risk is not translated into economic systemic risk by imprudent lenders and lessors. Correspondingly, an objective of each institution will be to minimize regulatory circumscription of its ability to optimize capital reserves.
Given the regulatory mandate to monitor and mitigate systemic risk, the trend is clear: increased regulation for lenders and lessors is the new normal. For institutions whose core business is the intelligent assumption of risk, the choice is not whether to build the culture, policies, processes and infrastructure to manage and account for risk, but how to do so in a cost-effective and minimally disruptive way. In fact, increasingly, I see solution acquisition being driven by risk officers themselves, where as previously it was driven by business or IT.
In the emerging regulatory framework, an institution’s risk management competency (or lack thereof) is a crucial component of its capital reserves profile. Adding to the complexity of the regulatory challenge, not only do institutions need to monitor, measure and account for risk-related decisions and activities, they must also be prepared to provide evidence of the adequacy of their risk management infrastructure and of the quality of their risk reporting.
As a result, the burdens for risk managers have taken on new strategic dimensions: not only must the bank’s risk management practices monitor and manage the institutions risk-creating activities, they must also provide the business intelligence needed to evaluate credit strategies that maintain competitiveness and support portfolio growth while achieving compliance and surviving regulatory scrutiny.
In this new setting, what was once an after-the-fact set of activities is being transformed into an integral component of every step of the credit lifecycle, from opportunity acquisition and evaluation to pricing, structuring, vendor partnering, funding, and fulfillment, with critical implications at every step for customer acquisition, retention and relationship management.
New challenges, new opportunities, and new regulatory strictures usually mean that new Investments in risk management and regulatory compliance will be needed. What is new is that such investments are now much more than a cost of doing business; they are essential to the ability of an institution to maintain competitiveness while managing risk, assuring risk policy enforcement, and optimizing reserves. In the “new normal” lessors must now focus on the adequacy of the risk-related data generated over the lifecycle of the transaction for achieving compliance at the transaction and portfolio level while meeting enterprise data aggregation and reporting requirements.
Of course, every institution will bring its own set of concerns and priorities to bear, but one thing is certain: minimizing or delaying the transition to expanded capabilities for informed risk management are the most expensive options. Conversely, making the commitment to build the culture, processes, and tools needed to meet the regulatory challenge will touch every part of the business.
This is where the opportunities come in. You now not only have to provide risk management at the business unit level (which was always the case, whether it was done successfully or not) but also support enterprise-wide risk management (and not via a giant Excel spreadsheet). In most cases, to achieve the required levels of data accuracy, standardization, centralization, and decision transparency, an organization is faced with two choices:
The first is to keep the existing silos (and almost all organizations I have encountered have them) between different market segments and roll out modified or new systems to each, and then put another layer on top that manages and consolidates info from the assortment of systems and processes to achieve the needed results.
The other option is to bite the bullet and streamline processes and systems across the silos. Many organizations I’ve met with have wanted to do this in the past, and some tried unsuccessfully, but there was not a sufficient mandate to overcome the organizational resistance to change. The new regulatory environment provides that mandate, because to achieve the needed end result by simply evolving each of the existing silos is an expensive (in both dollars, and more importantly, in skilled resources) proposition. So, regardless of whether you build your own solutions or buy, this can be an opportunity to finally rationalize your systems and processes.
Fortunately, what may seem at first to be a Hobson’s choice between one set of costs (continuing to use using existing tools and processes to achieve compliance inefficiently) versus another set of costs (enduring the overhead and expense of the transition to new solutions) may create additional opportunities to compete and win. Lessors need to consider: what are the benefits – beyond compliance - of sustainable and transparent risk management throughout the leasing and credit lifecycles? As long as you are centralizing platforms, is this the opportunity to revamp customer management, cross-selling or to roll out a new agent platform? How can better data quality and business analytics can not only reduce compliance overhead but also lead to competitive advantage?
Bottom line for the bottom line: In today’s regulatory environment, assuring compliance and managing risk can take your team's focus away from building relationships and growing the business. But with the right culture, processes and tools, the leasing team can focus on what it needs to do - winning deals, serving customers and increasing revenues with higher profitability. Investment is necessary to create a repeatable, sustainable, and transparent risk management and capital optimization strategy, but if seen as an opportunity, that investment can yield other benefits as well.