Learning how to navigate the regulatory fallout resulting from the recent bank failures of Silicon Valley Bank and Signature Bank has proven to be challenging for many financial institutions.
Read more: Takeaways From Recent Bank Failures
The root cause of these failures continues to be examined, and banks are looking for clear actions to take to avoid similar failures in the future. Chief Audit Executives (CAEs) and their internal audit teams are well positioned to learn from these shortcomings and can help prepare their organizations for possible issues in the future. By increasing line-of-sight into their organization’s risks and governance processes and aligning auditing activities to help strengthen overall risk management, CAEs are on the front line when it comes to preventing future failures at their organizations.
Five Key Actions CAEs Need to Take Now
The recent bank failures should serve as cautionary tales for CAEs on how to identify early warning signs of potential issues. The most successful CAEs will learn from these recent failures and implement practical steps within their organizations to avoid similar negative outcomes. CAEs should pay attention to their organization’s issue management process, continuous monitoring program, and execution of internal audits by:
- Providing effective challenge to the bank’s growth strategies to ensure appropriate leadership, experience, focus, and scale of the bank’s risk management framework and processes are commensurate with the level of desired growth
- Evaluating the level of uninsured deposits, including customer concentrations, when compared to agreed-upon metrics (i.e., overall deposits and assets) along with comparisons to peer institutions
- Increasing the focus on liquidity and interest rate risk management to ensure existing practices are effectively designed and implemented to adequately manage these risks and provide meaningful and accurate information to management and the Board for sound decision-making
- Validating that incentive compensation programs do not encourage excessive risk-taking to maximize short-term financial goals but reflect longer-term performance, non-financial risks, and appropriate closure of audit or regulatory issues
- Ensuring that management processes provide timely correction of regulatory, internal audit, or self-identified issues so that identified issues do not become stale or corrective management actions remain incomplete
Through careful examination of existing governance processes and controls, identifying potential gaps, and helping management implement corrective action, CAEs can help their organizations prepare for future issues.
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