The community banking sector, a critical part of our financial landscape, faces unique challenges in 2023. From increased regulatory complexity to the need for fostering innovation and talent acquisition, these institutions must navigate a rapidly evolving environment to stay competitive. Here we’ll look at the key challenges community banks face in 2023.
New regulations, such as the Community Reinvestment Act (CRA) changes, demand a fresh approach from community banks. These changes aim to improve lending, investment, and service in low- and moderate-income neighbourhoods, but they also increase the complexity of compliance. Banks need to upgrade their systems, methodologies, and procedures to meet the new requirements, which involve significant cost implications and increased technical debt.
Moreover, there’s an increasing emphasis on fair lending and the Equal Credit Opportunity Act (ECOA), and these changes require community banks to make proactive efforts in identifying and rectifying disparities. They need to implement robust compliance management systems to ensure that credit decisions do not discriminate based on race, religion, or other prohibited bases.
Talent Acquisition and Retention
The demand for risk talent is alarmingly high in 2023, with banks needing expertise in assets and liabilities, liquidity, interest rates, and capital management. To attract and retain top talent, community banks must be willing to compete, not just financially, but also through understanding and leveraging competitors’ trends, cultures, and behaviours. There’s a clear link between winning the battle for talent and understanding your competition.
Embracing innovation and fostering new business lines can also attract tomorrow’s clients and top talent. Banks that commit to innovation, especially in Banking-as-a-Service (BaaS) domains, pave the way for long-term relationships with fintech companies like Acorns and Current, which can attract future clients while retaining top talent.
In an increasingly digital world, community banks face growing cybersecurity threats, including ransomware, phishing, and DDoS attacks. Significant geopolitical events further compound these threats, with increases in cyberattacks against third-party service providers (TSPs), exposing vulnerabilities in banking networks.
To mitigate these risks, banks must implement comprehensive risk management practices, like the U.S. Department of Homeland Security’s Cybersecurity & Infrastructure Security Agency (CISA)’s Shields Up program. These include routine cybersecurity awareness training for employees, robust patch management programs, and strong protocols for protecting and testing backups.
Evaluating third-party vendor contracts and security controls is crucial, as is the need for reviewing, updating, and testing the incident response plan. In the event of a major cyber incident, the bank’s swift response will play a critical role in containing the damage and restoring services.
Tackling Third-Party Vendor Management
In the complex world of digital banking, maintaining an effective third-party vendor management program is not just a regulatory requirement but a critical shield against various risks such as data integrity/security breaches, non-compliance, financial risk, operational disruptions, reputational damage, legal issues, and threats to business continuity. These programs encompass a systematic process beginning with a comprehensive risk assessment, followed by thorough due diligence for each potential third-party vendor, contract structuring that includes robust security and performance stipulations, and consistent oversight and monitoring to ensure vendors meet the agreed-upon standards.
However, an often overlooked but equally significant aspect of these programs is the management of fourth-party vendors. These are the entities that your third-party vendors rely on, creating an additional layer of risk that can be invisible if not intentionally sought out. It’s crucial for banks to extend their risk management framework to these entities to maintain a holistic view of potential threats. An effective third-party vendor management program should, therefore, include a systematic process to identify and assess fourth-party vendors. This helps ensure that all parties involved in the service delivery chain are accountable, adhere to the necessary regulations, maintain robust security measures, and contribute positively to the bank’s operational resilience.
The Importance of Credit Risk Management
Credit risk management is a cornerstone of community banking that bears critical implications for financial stability, regulatory compliance, and overall reputation. A robust approach to managing credit risk does more than safeguard against unforeseen market volatility; it bolsters a bank’s standing among crucial stakeholders, from investors to customers.
Managing the process begins with strategic planning. Banks must clearly define their core values, and mission, and distinguish themselves within the competitive landscape. Analyzing peer and market data helps identify strengths and weaknesses and form realistic short and long-term goals. These goals should align with the bank’s risk appetite and be periodically reviewed against current and historical performances and trends. Next is the broad field of risk management, encapsulating non-financial risks—such as succession planning, compliance, and reputational risk—and financial risks, including capital planning, balance sheet management, liquidity risk, interest rate risk, and market risk. Regular stakeholder meetings defined Key Performance Indicators (KPIs) with clear triggers and a strong emphasis on talent retention form the backbone of this risk management strategy.
Attention to loan management is equally essential. The scrutiny applied to each loan should correspond to the bank’s risk profile as different loans demand varying levels of attention. Portfolio management must balance risk and reward judiciously. In addition, conducting regular internal validations of loan portfolios helps identify and address issues promptly, while stress testing and reverse stress testing provide additional layers of security. Comprehensive management reporting, independent validation of risk management programs, and regular governance evaluations serve to maintain an efficient, accountable, and transparent banking operation.
While the challenges for community banks in 2023 are considerable, they are not insurmountable. By focusing on regulatory compliance, talent acquisition, cybersecurity, and embracing a proactive approach to change, community banks can navigate the complex landscape of 2023 successfully. They must stay agile, seize opportunities, and invest in their future to ensure their role is integral to the financial services landscape.