A Conundrum: Perspectives on Banking and Risk Management, by Samuel Smith for Firestorm

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INTRODUCTION FROM FIRESTORM®

This White Paper- A Conundrum, Perspectives on Banking and Risk Management - was a speech presented at the Overby – Seawell Company Annual Conference on October 20, 2011.

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The speech by Samuel D. Smith, President, Pinales Consulting LLC and member of the Firestorm Expert Council™ offers critical senior level insights into the role risk and crisis management have in today’s economic climate for financial institutions. While his insights here focus on the banking and finance world, the principles apply to all businesses.

Samuel Smith’s perspectives were gained through more than ten years of experience leading this function as senior vice president at the Federal Reserve Bank of Cleveland, and as a banking consultant.

This White Paper includes best practices, valuable lessons learned from his years of direct experience, and a case study. The case study shows the financial impact on the Return on Equity and Assets caused by a service disruption, placing the case study bank in crisis and causing increased regulatory engagement in operations.

The views expressed are Samuel Smith’s and are not those of the Federal Reserve System. Mr. Smith is a member of Firestorm’s Expert Council™, and his insights align to the Firestorm Predict. Plan. Perform.® process.

Please contact us to discuss how this information applies to your organization.

A Conundrum

I chose, “A Conundrum”, for the title of my presentation, in part, because it is my favorite white wine. It also describes the current economic and banking environment. The banking industry is struggling to recover from the financial crisis and a painful recession, while at the same time it faces sweeping new regulatory burdens. The industry is also coping with a weak economy, unusual fiscal and monetary policies, political gridlock, and an uncertain financial landscape in Europe.

Disappointingly, some of the government’s responses to the financial crises are at cross purposes. As if that is not enough, natural and manmade disasters seem to be happening with increasing regularity. These have affected banks in many parts of the U.S. Notwithstanding all of these facts, banks have made good progress, which I will explain.

The State of the Economy

Regarding the economy, I’ll start with a little story. In May 2007 when I retired from the Cleveland Fed, the housing market was a major concern, but I don’t remember the mortgage backed securities (MBS) market being a worry. Later in an August speech that I attended a high ranking Fed official said that three weeks earlier deal making by Wall Street banks came to an abrupt halt. He wasn’t specific, but I now think that the banks must have feared that the mortgage backed securities market was going to tank. He said that aside from the housing issue, the real economy was functioning well, but the Fed was becoming concerned about the financial economy, and they were working hard on it.

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