BankNews Feb. 2015

Search Results: Risk-Management

Fed Announces Final Rule Establishing Risk-Management Standards for FMUs Designated as Systemically Important

July 30 – The Federal Reserve Board has approved a final rule establishing risk-management standards for certain financial market utilities designated as systemically important by the Financial Stability Oversight Council. The final rule also establishes requirements for advance notice of proposed material changes to the rules, procedures or operations of certain designated FMUs. FMUs, such as payment systems, central securities depositories, and central counterparties, provide the infrastructure to clear and settle payments and other financial transactions.

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Fed Reaffirms Policy of Applying International Risk-Management Standards to Fedwire Funds, Fedwire Securities Services

July 20 – The Federal Reserve Board has reaffirmed its long-standing policy of applying relevant international risk-management standards to the Federal Reserve Banks’ Fedwire funds and Fedwire securities services. These services play a critical role in the financial system and in facilitating the safe and efficient settlement of private-sector financial market utilities.

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The Best Laid Plans Oft Go Astray

By Kristen Burgess

“Everyone has a plan until they get punched in the mouth.”

This famous quote by heavyweight champion boxer Mike Tyson holds striking relevance to risk management in the present environment. Even some of the most market-savvy, plan-oriented farmers weren’t prepared for the beating that grain prices took in 2014. For those who had the good fortune and insight to lock in forward contracts or hedge some of their grain in the futures markets, the blows haven’t been quite as bad.

Commodity marketing is no simple affair. Creating a successful marketing strategy is a dilemma all producers face, and executing that strategy can be even more challenging, especially a volatile market environment.

Being able to plan effectively and balance risks against rewards has always been an integral part of life and business in agriculture. However, gone are the days when this balance can be found through the analysis of a shoebox of receipts and the pages of a yellow notepad. When it comes to decision making, the modern producer is juggling cash offers, brokerage positions, crop insurance, production costs and financials. With ever-changing market prices and input costs only increasing, farmers and ranchers are searching for new and innovative ways to manage risk and profitability.

This was the struggle that Mark Frank and Pat Kroese saw that led to the creation of their risk management software company, GrainBridge, in 2006. With more than 40 years of combined experience in agricultural financial planning and risk management, the college best friends had seen firsthand the chaos and stress farmers and ranchers experience when trying to manage all of the moving parts of their operations.

“We just knew there had to be a better way,” says Kroese when asked about why he and Frank created their risk management software. “Producers have access to such amazing technology today, even in the field. We knew there had to be a better way for them to manage their business and make decisions than juggling multiple spreadsheets, a file cabinet of records and contracts, and that old trusty yellow notepad.”

As the two entrepreneurs set out to lay the tracks for this better way, they began with a focus group of farmers to get feedback as the blueprint for the program was drawn. In trying to create a comprehensive program for managing the cogs and gears of risk and profit on a farm, one criteria resonated throughout the process: “Keep it simple and we’ll use it.”

And so, with the help of talented banking software engineer Chafik Barbar, a simple, user friendly yet highly advanced set of risk management tools was coded.

When GrainBridge took GB 1.0 to market in 2008, the founders chose not to sell the product directly to producers. Instead, their software was made available to ag businesses — lenders, co-ops, brokers, consultants — that work directly with producers. Some of GrainBridge’s partners use the software as a differentiating factor to bring added value to the services they offer their customers. Others use GrainBridge as a part of a paid add-on service — such as marketing assistance. GrainBridge intends that its software be used as a platform: Each user may customize the software in ways that are best tailored to its business and customers; the common factor is the new levels of efficiency, organization, and transparency the program brings to the business and its customers.

More than half of GrainBridge’s partners are ag lenders. Farm Credit Services of America, one of GrainBridge’s oldest clients, makes the risk-management software available to its banking and insurance customers. FCSA Vice President of Insurance Operations Bruce Green sees GrainBridge as a valuable tool for his association’s customers.

“GrainBridge allows our customers to determine break-even prices for their operations, create and track individualized marketing and profit goals, and see the impact that crop insurance can have on their marketing plans,” he says.

Green, like many other users of the software, finds particular value in the program’s stress-testing tools. “The what-if analysis allows customers to see, within minutes, the impact that changes to yield, price and other variables can have on their profitability.”

So, how are all of these complex, moving parts of an ag business brought into one simple program? The whole process is quite intuitive:

    • The first step is to create profiles for all major crops/livestock entities by year to establish potential production and marketable product.
    • Next, the user enters per-acre, per-head and gross expenses, as well as off-farm incomes, to develop a break-even, profit goals and benchmarks for the coming year.
    • Users track all marketing including cash, futures and options with current market prices updated each day to provide a sense of potential profitability. Brokerage transactions can be imported automatically for ease of use.
    • Crop insurance is incorporated by indicating location, insurance policy, and coverage levels. This information is utilized in running what-if scenarios and calculating possible payments.
    • The what-if analyzer stress tests the operation to see exactly how variables such as yield, market prices, insurance prices and basis affect the bottom line.
    • All of the data and analyses in the program are brought together in clean, clear-cut reports that provide a comprehensive look at an operation’s risk management strategies and overall financial health.

Putting all of this information in one place helps to understand potential profitability, and to know when and how to better execute. “Pulling the trigger” is the hardest part for many producers, but Missouri farmer Remington Pierce says, “With GrainBridge, I know exactly what my total costs are, not just my inputs. [Tracking these] helps me be ready to take advantage of a market change.” Indiana farmer James Cormany echoes this sentiment, noting the ease GrainBridge has brought to tracking futures and options trades. “I know where I’m at with my positions on any given day to help make intelligent trades,” Cormany says.

Last year was a benchmark year for technology, with big data, automation and robotics becoming integrated into day-to-day decision making for agriculture. This leaves fewer and fewer reasons for ag businesses to allow themselves and their customers to take that financial punch in the mouth when there are tools and technologies available to effectively protect yourself.


Kristen Burgess is an account manager with Omaha, Neb.-based GrainBridge. Contact her at 800-515-5657 or




10 Steps to Building Your Ultimate Team Culture

By Simon Smith

The techniques we’re sharing with you here are a core menu of tools we’ve used for team development from non-management staff and new managers right through to a team of C-suite/ senior SES Executives and everything in between. The tools are a loose mix of Design Thinking, LEAN/Six Sigma methodologies and our own practical solutions developed from experience.

We’ve effectively applied these tools in a wide range of team development needs including: improving team cultures; raising productivity, breaking down team and organizational silos; helping an existing team to work better together rather than as a group of individuals; helping teams merge or change the way they work/ work with a new manager/ use new systems or procedures; resolve productivity problems; even forming a new team or organization from scratch.

1. Work Out a Vision for the Team

Get all potential and current team members together to brainstorm: “what will be happening in the team when it’s functioning well and doing what it should be doing?” This is your vision for the future you’re working towards.

When doing this, shelve the current practices and ways of thinking. Put the practicalities and current reality to one side for now. This is about what the team want it to look like if they had the choice. This part is very important as you don’t want the team to be limited by the potential constraints of current thinking.

Write down what will that vision look like in terms of what each team member will See, Hear and Feel going on around them. Be as specific as possible – the more specific, the better.

Write each of these points down on a separate sheet of colored paper, each with a heading of See, Hear or Feel and stick them up on a wall. Alternatively you could use colored post-it notes if space is limited.

2. What Behaviors and Actions Need to Happen to Make that Vision Come to Life?

Get the team to express what behaviors they need to Start, Stop or Keep doing to make that vision happen. Make sure the focus stays on the vision and doesn’t descend into the current reality, especially if that current reality is not too flash.

3. Park Problems

If problems arise, all agree that you will park them temporarily instead of going into detail about them. Write them down on the paper, stick them somewhere relatively out of view. You can come back and look at them later. The idea is to focus on the solution and practical, positive things you want to achieve, not focus on the problems. And anyway, often the problems ‘miraculously’ seem to disappear as things progress.

4. Decide Actions

As Thomas Edison said, “vision without execution is just hallucination”. Vision determines what you want. Strategy and tactics determine how you do it. Action – and persistent, continual action that relates to the vision – determines what you get.

The mistake most people make in any facilitation (or any training, Executive Coaching, self-help seminars, etc.) is that they don’t translate all the lovely visioning and strategy-making into cold, hard, rubber-meets-the-road action for when they get out of the room.

So the next step is to allocate actions to each thing you want to Start, Stop or Keep doing. Forget the long term, focus on the first action people need to take when they walk out of the room. It could be as simple as “book a meeting with all of the team to agree the top 8 most important teamwork behaviors”. The idea is that action will then cascade into further action.

5. Prioritize

Prioritize what you want to achieve in order of importance ideally, then time/urgency. As Stephen Covey says, “urgent isn’t necessarily important, so beware of the distinction as you decide priority for each item”.

6. Accountability: Allocate Responsibility to EACH Action

Make sure every action has at least (and ideally just!) one person who is responsible for executing it. Write that person’s name on the paper so that they have ownership of it.

7. Accountability: Decide Start and Due Dates

After deciding personal responsibility for the action, set a timeline. And set a start date as well as a due date. You need a due date, of course, but set a start date as to when the action needs to commence to make sure everything is done by the due date.

We see from experience in our Time Management training, when people work purely on due dates, things often get left until the last minute and are consequently rushed, done poorly or the due date is missed entirely due to lack of prior planning. In 3 months time when the due date is the next day and you’re still stressing, you’ll wish you’d started today!

8. Summarize Action

Summarize who’s going to do what and when, make accountability pacts if you can.

9. Put Actions in your Calendar/Diary!

As we teach in our Time Management course, put your actions in your diary/calendar on the start date and make sure you note the due date. Otherwise they’re likely to sit in your notebook or electronic notes and nothing happens.

10. DO IT!

Remember, strategy not coupled with action will never be more than the brain cell it occupied! As the ancient Chinese proverb says: “The person who says it cannot be done should not interrupt the person doing it.”

And finally: “Don’t be afraid to take a big step if one is indicated. You can’t cross a chasm in two small jumps.” (David Lloyd George).

Simon Smith founded & runs Southern Cross Coaching & Development Pty Ltd.
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Avoiding the Mortgage Lending Conundrum

How Commerce Bank met customers’ home-financing needs without excessive costs and risks.

By Dennis Hardiman

Offering mortgage products is critical to a bank’s success; however, the risk, complexity and cost of lending has forced some institutions to exit the business completely. For those leaving — and even those that have yet to enter — there are also challenges to not offering mortgage products. Consumers expect their banks to provide a full array of financial products and services, including mortgages, and failure to do so means customers will shop elsewhere.

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Effective Interest Rate Risk Management

Enterprise Risk Management Frameworks Help Provide the Answer

Reviewing the roles of ALCO and directors

The FDIC Winter Supervisory Insights publication details in-depth the responsibilities of Management and Directors in an Asset Liability (A/L) process which results in effective management of the bank. We traditionally have viewed these reports and similar publications from the Federal Reserve and OCC, as meaningful blueprints for what future examination cycles could focus on. Dissecting these publications for parallels to specific issues impacting your Bank can serve as a step towards confident exam preparation. In this article, we focus on Board and Asset Liability Committee (ALCO) responsibilities outlined by the FDIC and recently published interest rate risk metrics by the OCC.

Earnings Pressure and the Rate Forecast Backdrop
The stubbornly slow economic recovery was difficult to diagnose early after the recession ended in 2009. The corresponding prolonged period of very low interest rates has confounded economic forecasters for the last five years. For example, according to the Blue Chip Financial Forecast in July 2009, expectations for the Fed Funds rate two years out (2011) was a whopping 3.26%. Contrast that with Fed Fund Futures currently trading around 1.25% – 1.75% in 2017. This misdiagnosis early on in the recovery had the effect of tamping down the willingness of many banks to extend 3-5 year fixed rate loans or add long-term assets to the investment portfolio – both common practices today. On the liability side, depositors too have been unwilling to tie up funds beyond 12 months resulting in ballooning non-maturity deposit balances across the industry.

In an effort to cover non-interest expenses and deploy capital, banks continue to find this environment difficult to navigate. This precise predicament was pointed out by the OCC as a key risk facing community and midsize banks. Persistently low rates and a slow growing economy have led to an era of incremental lengthening of assets, loosening of lending standards and short-term retail deposits.

Directors’ Responsibilities
With this backdrop, consider the oversight responsibilities the FDIC outlines for Bank Directors. According to the FDIC, “The usefulness of an IRR measurement system depends on the reasonableness of the assumptions that are used as inputs” and that the board of directors should complete a periodic review of the key assumptions used in the modeling process. This review is aligned with the ultimate responsibility the board has for the degree of interest rate risk taken by the institution.

Active director involvement is also cited by the FDIC as an important component in the ALCO process at well-rated institutions. Participating in discussions pertaining to policy exceptions and key determinants of changing risk profiles are noted, in addition to discussing pricing strategies and product mix with management in the ALCO meeting. On an annual basis the board has the need to assess the third party review of the ALCO process as well. In short, it seems involvement beyond cursory review of the current rate risk position and rate environments is the responsibility of an effective Board.

Asset Liability Committee Responsibilities
The ALCO Committee has both oversight and strategic responsibility. At the most basic level, ALCO specifically needs to review and approve the assumptions feeding the asset liability model and understand the interest rate risk position of the institution. In most cases, this needs to be a quarterly process at a minimum, but could be more frequent in times of quickly moving market rates, developing competitive pressures or new product introductions. Next, ALCO should continually discuss ways of mitigating risk, review impact of proposed strategies to interest rate risk, capital and projected earnings. After reviewing these potential impacts, it falls on ALCO to approve the strategies for management to implement and review going forward. Finally, ALCO maintains the responsibility to implement modifications to the A/L process based on annual third party review.

The recent rate environment places additional demands on ALCO. Growing regulatory attention on non-maturing deposit balances places the responsibility on Banks to develop and maintain pricing change betas and decay rates for these deposits. Additionally, diagnosing and modeling potential migrating behavior of these balances going forward should be analyzed by ALCO by completing change in deposit mix simulations to determine potential liquidity and earnings implications.

In the end, the A/L process is a key tool to manage interest rate risk, an item the FDIC calls “one of the most important jobs of a banker.” The process can be burdensome yet it’s incumbent upon us as bankers to use this process not only for regulatory compliance but also as the means to drive stable long- term earnings of our institutions.

The BOK Financial – Financial Institutions Group provides third party asset liability reviews, modeling, consulting, decay rate studies, and investment portfolio strategy. They can be reached at 866.440.6515 or learn more at

© 2015 BOSC, Inc. Securities offered by BOSC, Inc., member FINRA/SIPC. Asset liability modeling, CD underwriting, portfolio accounting and safekeeping services are provided by BOKF, NA, an affiliate of BOSC, Inc. Investments and insurance are not insured by the FDIC; are not deposits or other obligations of, and are not guaranteed by, any bank or bank affiliate. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice.

Pay It Forward

By Michael Scheibach

Winston Churchill once said, “It is always wise to look ahead, but difficult to look further than you can see.” Of course, the words of the man who steered Great Britain through the perils of World War II did not portend the current state of the payments industry. But Churchill’s words are quite appropriate for describing the real challenge to grasp where the world of electronic payments is taking the financial services industry.

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Top Opportunities for Bank Growth and Profitability in 2015


New Deposits and Healthy Lending Help Pave the Way

By Jason Young

image002Q: It looks like the 2015 forecast for the banking industry is continuing to point toward the positive, especially after I reviewed the latest numbers from the FDIC. So, how do you see the economic recovery playing out this year?

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Third-Party Risk Management Software Introduced for Community Banks

November 10 — ProcessUnity has introduced Vendor Cloud Community Bank Edition (CBE), a new version of its flagship vendor risk management solution aimed at helping smaller financial institutions identify and remediate risks posed by third-party service providers. 

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Credit Risk in Shared National Credit Portfolio Is High, Say Federal Agencies

November 7 – Federal banking agencies found serious deficiencies in underwriting standards and risk management of leveraged loans in a report released recently.

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