Let's get real

It started out optimistically enough. New York Fed President Timothy Geithner was painting a pleasing picture of the economy and the banking system. Then he said, "Of course, not much is certain in economics and finance." Geithner was delivering the keynote address at the RMA Global Operational Risk Forum held in New York in January. The warnings that followed his optimistic beginning ended up on page 2 of The Wall Street Journal on January 14. Four broad concerns were 1) fiscal sustainability amid rising debt-to-GDP ratios; 2) the impact of a towering trade deficit and heavy (and possibly fickle) investment of foreign investment to help fund the deficit; 3) further stresses on the trade balance from gangbuster growth in India and China; and 4) prospective changes in the global exchange rate regime. After we all took a breath, Geithner stressed that the U.S. has retained important strengths, many of which I believe stem from improved risk management practices. Geithner concluded by saying the U.S. needs to remain committed to price stability, work on the balance of trade, and carefully manage the transition to a global monetary system that affords more flexibility in exchange rates. In addition, financial institutions must retain enough capital to absorb shocks. Implicit in his message was the criticality of continued improvement to risk management techniques. RMA's development of KRIs--key risk indicators to manage the more elusive nature of operational risks--is just one part of your Association's pledge to keep its member institutions on the cutting edge of risk management.

Also in January, RMA's Regulatory Relations Council met with the industry's regulators. In the past, this meeting has always included a lengthy discussion of credit issues and the lending environment, in addition to capital management, the Shared National Credit Program, and so on. This year's meeting had one topic: compliance and unrealistic expectations. Because of high-profile and large cases showing banks to have poor judgment-in particular, the Enron debacle and the Riggs Bank indictment for failure to report SARs in its Embassy accounts--Congress has told the regulators to greatly strengthen their examinations to ensure full compliance with the USA Patriot Act and Sarbanes-Oxley. The good news--if there is any--is that bankers and regulators are on the same side, and the task ahead is to help policymakers align good intentions with feasible regulatory requirements. We heard from Federal Reserve Board Governor Susan Bies, Acting Comptroller of the Currency Julie Williams, and several senior staff of the OCC and the Fed. The group also met with Eugene Ludwig, former Comptroller of the Currency and founding partner of Promontory Financial Group, LLC, an advisory firm that works with banks and bank boards on governance and related issues. All agreed that criminalizing SARs (suspicious activity reports) errors or omissions could have unintended consequences and prove counterproductive. We were told that Fed chairman Alan Greenspan also is aware of the problem. Unfortunately, as Ludwig said, the current trend shows no signs of changing in the coming 18 months, making it that much more urgent for representatives from the financial services industry to talk with policy makers with the goal of educating them on the seriousness of the current situation. I urge each of you both to speak out on the issue and to be very, very thorough as you try to work within an extraordinarily tough regulatory environment. Two articles in this month's RMA Journal may be of particular interest as regards this issue: "The Bank Secrecy Act: Tips for Getting It Right" by Ann Jaedicke (page 17) and "Coping with the New BSA Compliance Imperative: An Exercise in ADApTation Management" by Richard Riese (page 22). An article based on a recent audioconference sponsored by RMA and the American Association of Bank Directors will give the community bank perspective on BSA in the April issue of the Journal.

Maurice H. Hartigan II

RMA President and CEO

COPYRIGHT 2005 The Risk Management Association
COPYRIGHT 2005 Gale Group