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The defi Team Banking, defi INSIGHT

community bank risk management

Effective community bank risk management is about taking initiative. To reduce risk across the board, community banks have to be nimble, lean, and proactive. They have to accurately identify vulnerabilities, anticipate future regulations, and take advantage of new opportunities to improve security and communication. 


That’s all often easier said than done. The main problem is that community banks don’t have as many risk management resources at their disposal as larger federal banks. They’re also less likely to get a generous government bailout if something goes wrong. So community banks need proactive risk management systems that leverage resources they already have.

Community Bank Risk Management Isn’t Enough. You Need Enterprise Risk Management

The biggest mistake that community banks make when they create a risk management system is spending too much time on individual risks and not enough on the system as a whole. 


Traditional community bank risk management identifies risks and finds ways to either mitigate or leverage them. That’s out-of-date because it’s reactive, not proactive. It’s also an endless task and major time-sink. You’ll chase one risk after another without feeling as if you’re making any real progress. Being reactive also exposes your bank to liabilities. If you can’t anticipate weaknesses in your system, you could lose money or face regulatory penalties. 


This is why community banks are moving away from traditional risk management and embracing enterprise risk management. Enterprise risk management (ERM) is a system that goes beyond the usual routine of identifying and responding to risks. ERM works by:


  • Using predictive modeling to identify possible risks; 
  • Closely monitoring active loans and other accounts to find hidden data patterns or previously unidentified red flags; 
  • Producing detailed data analytics reports on a frequent basis; 
  • Communicating risks as quickly as possible so community banks can close security loopholes or handle delinquent accounts before they default.

ERM also manages more than just credit risk. In the past, community bank risk management mainly involved looking into a prospective borrower’s credit history. Loan officers or other risk control officers at the bank were the main line of defense against delinquencies, defaults, and fraud.


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However, today’s community banks offer more services—including online banking—and more ways for customers to get in touch with bank representatives. In this new digital environment, community banks have to manage risk from many more angles. They still have to think about credit risk, but they also have to consider other risks such as:


  • Mobile and online security; 
  • Automated loan decisioning; 
  • Customer communications; 
  • Operational efficiency
  • Third-party vendor communications; and more.

In the digital age, community bank risk management has become more complex than ever. To keep up, banks have to change the way they approach risk, and create an agile system that will evolve alongside emerging banking technology trends.

Essential Community Bank Risk Management Best Practices

To effectively manage risk in today’s financial industry, community banks should focus on the following best practices:


  • Work with a trustworthy third-party risk management vendor: Many community banks try to keep operations as lean as possible to save on overhead. However, this also means that banking staff often doesn’t have the time, resources, or experience to thoroughly manage risk. Hiring a third-party vendor is the most cost-effective way to reduce risk. The best vendors handle every detail for you so that your staff can focus on other tasks, like customer service or internal operations.
  • Create a culture of risk reduction: Everyone at the bank should be responsible for managing risk to some extent. When you introduce systems for reporting risks and communicating new risks with the team, you encourage people to search for possible risks themselves and speak up when they find them.
  • Collect and analyze data: Data is a bank’s most valuable asset. When you collect as much data as possible on prospective borrowers (including alternative credit data), delinquency or default rates, interest rates, and more, you can make better risk predictions. Excellent data governance and management can eliminate information silos. All of your data should be securely stored and connected so that you can find important patterns that you otherwise would have missed.
  • Automate community bank risk management systems: If you use a modern loan origination system (LOS) or a risk management platform, you can automate certain tasks to keep your system secure and reduce lending risk. Automated loan decisioning rejects high-risk applications based on the latest data analytics and predictive models. There’s less room for human error.
  • Anticipate regulations: Don’t wait for governing bodies to tell your bank which rules to follow. While it is crucial to follow all current regulations to the letter, you can also predict future regulations if you keep a close watch on industry best practices and trends. When your system is designed to catch hidden risks, you’ll stay ahead of the curve.

The most effective community bank risk management system is one that includes all of these best practices and is tailored specifically to your institution. With help from an experienced third-party vendor, you can create a streamlined and modern system that protects your institution and your customers.

You Don’t Have to Manage Risk Alone

Some community banks make the mistake of assuming they can handle risk management all on their own. However, even the most experienced and successful community banks need some support. One of the main benefits of hiring a third-party risk management vendor is that you can more easily prove that you are compliant with banking regulations. This speeds up the compliance review process. Vendors also take on most of the risk management burden, which frees up your staff’s time and resources. 


However, to gain all of the benefits of hiring someone to manage your risks, you need to work with a vendor that actually understands your institution’s unique needs. Some vendors ask you to provide a full accounting of every possible risk yourself. The problem with this request is that it’s time-consuming and you may accidentally leave some important risks off the list. 


Instead, look for a vendor that takes on this responsibility. The right vendor will perform a detailed data analysis upfront and provide you with a full accounting of potential risks. The best vendors will also continue to monitor your risks over time and stay abreast of regulatory changes that affect your bank. In other words, the best community bank risk management system is fluid, not stagnant. Vendors that understand this very important principle are better equipped to help you manage risk at every level and protect your institution’s future.



Getting Started

defi SOLUTIONS is an experienced community bank risk management vendor. We provide community banks with a full accounting of individual risks, an advanced data analytics system, a state-of-the-art LOS, and more. If you want to improve the way your bank handles risks, contact our team today or register for a demo.


Get in touch with us today and get a demo!


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