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Evaluating your risk appetite and loan portfolio

Jan 17, 2023
By: Ivar Peterson

It’s the time of year to evaluate past performance and think about how to manage risk better.

All of us look at risk differently. Some may be more conservative than others, but we all have an appetite for risk and we all have an end goal. How we get there is different for each of us.

Risk appetite framework

Policies help financial institutions set standardized procedures and guide management and staff in operations and administration.

Some policies also help to set the framework for the types of loans a financial institution will make during the year. Within those policies, a few also help to set goals and outline the risk appetite that a financial institution is willing to accept within regulatory requirements.

Here are some examples of those policies:

  • Loan policies
  • Concentration policies
  • Diversification policies
  • Credit risk management policies
  • Asset and liability management policies

If your financial institution has an established risk appetite that aligns with your strategic objectives, capital plans and liquidity requirements, there are some related, key questions to ask yourself:

  • Has the board established a risk appetite that articulates the aggregate level of risk and types of risk the board and management are willing to assume?
  • Have risk parameters and limits been established for specific business lines and for aggregate risks, including concentrations?
  • Has the risk appetite been communicated throughout the financial institution?

The market environment

Looking back, we all realize that some of the decisions we thought to be good business didn’t turn out that way for various reasons — even when the loan was made within the financial institution’s established policies.

Who would’ve ever thought that some customers would have to shut down their business, or that others still wouldn’t have recovered back to their pre-pandemic earnings and profits?

We’ve been through many crises over the years, including the agricultural crises of the early 80s, the savings and loan crisis, the dotcom bubble, the mortgage crisis and the COVID-19 pandemic. Each crisis that occurred affected the financial services industry and the customers served by them.

Often, there can be early warning signs of a crisis, but we don’t see them or we’re too busy working in the business instead of on the business. Sometimes we’re so caught up in our daily activities that we just don’t have the time, staff and resources to evaluate our loan portfolio thoroughly.

Whatever your risk appetite, the changing environment will affect your customers’ financial performance. Consider how rising interest rates, supply change shortages, increased material costs, increased labor cost and labor shortages will affect your customers’ business.

How Wipfli can help

You can’t predict the future, but you can get an outside perspective with a Wipfli loan review. We can help you evaluate the risks in your loan portfolio quickly and at a large scale.

Contact us today for help feeling more confident in your internal processes and credit quality.

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Ivar Peterson, CLBB
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