What’s the Risk?
– Camron Selby
“Progress always involves risks. You can’t steal second base and keep your foot on first.”
-Frederick B. Wilcox
We all take calculated risks every single day. Driving your car, playing sports, or eating convenience store sushi. Risks are a part of life. If I asked you to calculate the risk of skydiving, chances are your response would be different from the next person based on your comfort level with high-adrenaline activities, fear of heights or falling, and other factors. Our acceptance of risk is typically based on our previous experiences, our level of risk tolerance, and what controls are in place to mitigate those risks to an acceptable level.
Similarly, banks face a myriad of risks that they must appropriately assess and monitor to protect their stakeholders (customers, employees, shareholders, regulators, etc.), determine strategic objectives, and even navigate unprecedented times like a global pandemic. However, while certain levels of risk are unavoidable, preparation and proper management can make all the difference.
Risk can be defined as the possibility of an event occurring that will have an impact on the achievement of objectives. Banking, in general, involves several risks including credit risk, compliance risk, reputation risk, liquidity risk, strategic risk, operational risk, and so forth. The list goes on and on. Just like your rationale for calculating the risk associated with skydiving, banks address these risks based on several factors including past experience, customer demographics, location, risk appetite, and regulatory requirements. Generally speaking, banks have the same goals of rendering service and maximizing value for their customers and shareholders, but their methods of reaching those goals and the risks associated with them can vary depending on their risk tolerance, operational objectives, and financial performance.
Take credit risk for example. This is probably the biggest risk facing a bank. Banks will lend based on their areas of expertise. For Medallion Bank, our niche is in recreation and home improvement financing through third parties. Other banks may focus on commercial real estate, construction and development, student loans, credit cards, or small business administration (SBA) lending. Each of these lending areas offers unique advantages as well as risks not found in other loan products. Therefore, a bank’s policies and procedures should address those risks to provide consistent underwriting practices, in accordance with lending laws and regulations, to best meet the needs of its customers. A bank’s Board of Directors will identify goals and provide overall governance, and will empower management to work towards the achievement of those goals.
Risks are continuously evolving and never static. While elements of risk management certainly fluctuate, they generally include elements that measure potential impact and likelihood. Banks will create a risk profile that includes risk identification, risk assessment and prioritization (risk analysis), risk response, and risk monitoring. Each of these elements helps bankers create a culture that identifies trends and minimizes possible adverse scenarios to protect bank assets and maximize value, which are essential elements customers look for when choosing a bank.
Fine-tuning your Goals
2020 has been an eventful year, to say the least. At Medallion Bank, we have adjusted to the circumstances and changed how we operate. However, we continue to focus on our core competencies of consumer lending, which is what we’ve been doing for the past 17 years. Our desire is to put your mind at ease by assuring you we not only are aware of the inherent risks of banking but have taken the necessary steps to appropriately address and manage those risks. If you are thinking about purchasing a recreational product or making some upgrades to your home, let us reduce the risk of that decision by providing the financing to help make those dreams possible. In turn, you can focus your desired risk-taking on other areas of your life, especially if that involves jumping out of a perfectly good airplane.