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The Essential First Step to Take Before Conducting a Risk Assessment

2 min read
Nov 18, 2014

Developing a successful compliance strategy starts with this essential step.

One of the best parts of working with more than 500 financial institutions nationwide is the exposure to so many different compliance perspectives and approaches.

While there are many similarities between institutions, there are equally many things that make these institutions unique. We have learned that these differences may be derived from their history, distribution structure, culture, individual talents, underlying market demographics, socioeconomics, and the products offered to their end client.

For example, two financial institutions operating across the street from one another may have very different business strategies. Therefore, the approach we should collectively take for each risk assessment must be customized to the individual institution.

A Compliance Risk Assessment Starts with Understanding Where & How You Operate

Similarly, the approach you take to determining your regulatory compliance strategy starts with recognizing the “performance context” in which your financial institution operates.  Performance context is the set of conditions, both internal and external, which mediate, support, and influence the financial institution’s business operation. The Federal Reserve defines it as “a broad range of information that examiners review in order to understand the context in which to review a Bank’s performance.”   

To evaluate an institution’s inherent risk and related controls, you have to understand its unique attributes. The Interagency Fair Lending Examination Procedures says that compliance risk factors include “the size, scope, and quality of the compliance management program, including senior management’s involvement, designation of a compliance officer, and staffing.” They also state that programs should be compared to others of “similar size, market demographics and credit complexity.” While this guidance is broad and gray, the spirit of the guidance intuitively makes sense. It's very important to understand the unique elements of the financial institution when evaluating compliance risk

Case in point, I recently had the opportunity to speak to a great group of bankers at the Asociación de Bancos de Puerto Rico conference. With one glance at their agenda, it was clear that Puerto Rican bankers are focused on the same consumer regulatory compliance concerns we all share.

However, it is critically important to recognize that the market, demographics, socioeconomic factors and credit needs in Puerto Rico are very different. Said differently, the approach to applying compliance best practices in Willistown, North Dakota, an oil boom town, may not be the right approach for a bank focused on providing services in Puerto Rico.

It's essential to understand performance context before any assessment, review or strategy is set forward. Puerto Rico bankers are dealing with some very unique demographics, economics and offer some different products. These unique attributes should color their outlook and approach, just as your institution's unique attributes should influence your approach.

TRUPOINT Viewpoint: Regardless if you are working with an internal staff, external consultants, examiners or regulators, your unique Peformance Context is the place you should start for successful compliance management. It really is as simple as this: seek first to understand before applying industry standards or best practices.

To do so, ask yourself what sets your institution apart? What defines the way you operate? What are your primary concerns and how does that compare to peer institutions? Once you understand this performance context, you can start a risk assessment with valuable perspective. Great wisdom comes from listening and understanding before you decide the path forward.

Click on the image to immediately view a free, simplified Fair Lending risk assessment!



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