Recession Risk: What’s the Role of the Risk Committee?

By Debra Cope

The essential question for any board risk committee can be boiled down to two words: What if? And these days, one of the burgeoning what-if questions focuses on the risk of a global recession.

“A lot of today’s lenders didn’t experience the last downturn,” says Jennifer Burke, a partner in the financial services consulting practice of Crowe, which ABA endorses for governance, risk management and compliance consulting services.. “New considerations, such as cybersecurity, are important, but they should not overshadow some of our fundamental blocking and tackling, like preparing for recession.”

In the aftermath of the Great Recession of 2007-09, the U.S. and world economies have enjoyed an extraordinary decade-long expansion. This is the time when board risk committees should be considering how the bank would be affected if the economy weakened, Burke says.

While the technical definition of recession—two consecutive quarters of declining economic activity—has not been met, expectations of a slowdown are rising.

In its Semiannual Risk Perspective report issued in May 2019, the OCC cited “increased economic consensus for a slowing economy and a higher probability of recession.” The Federal Deposit Insurance Corp.’s annual risk review in late July 2019 pointed to signs of slower economic growth and increased market volatility.

Meanwhile, a multi-asset investor survey issued in July 2019 by Absolute Strategy Research found that expectations for a global financial downturn are now at their highest level in four years. The survey found that investors anticipate a 45% chance of a global recession in the coming 12 months, the greatest risk since the survey began in 2014. The findings are based on a second-quarter survey of more than 200 institutions that control a combined $4 trillion of assets.

Evaluating a recession’s potential impact on a bank falls to the risk committee, if a standalone committee exists, or typically to the audit committee if it does not, Burke notes. Risk committees already have a lot on their plates, she adds, including cybersecurity, credit quality, competition, market disruptions and changing customer expectations.

The committee responsible for risk can play a key role in unraveling the potential impact of a recession on the bank by connecting the dots between what other committees are hearing and saying about underlying risks, such as the impact of reduced underwriting standards and persistently low interest rates, Burke says.

“They need to understand what is important to the credit committee and the audit committee, as well as executive management and the chief risk officer,” she explains.

“The risk committee has one of the most difficult roles on a bank board of directors. Risk is about the potential things that can happen. By definition, that is an ever-changing list,” Burke adds.