Lack of Diversification: Because smaller
financial institutions generally have a lack of diversification in
product lines and operations, there is little room for error. As a
result, strong governance practices and a thorough understanding of
the risks that are being taken are critical. The board of directors
should develop a well thought out risk appetite as well as a
strategy to deal with risks. The risk appetite and the strategy
should be communicated throughout the institution and put into
measurable terms that can be monitored.
Independent Control Functions: In smaller
institutions, there may be less segregation of duties and roles
which can be seen in blurred lines that exist between management
and directors. The board should focus on maximizing functional
independence (e.g., the board should ask the question whether the
control function personnel have clear performance objectives that
link to the management of risk rather than targets related to
profit, revenues and volume?). The boards should seek information
about best practices from third-party reviews from time to time to
benchmark the institution's risk management practices and
Board Composition: The boards of financial
institutions need to have some relevant financial industry
expertise, in addition to an array of other skills. Financial
institutions are different from other corporations. The nature of
their business means that they can be more opaque to the outside
than other corporations. Financial industry expertise on the board
would provide an extra pair of informed eyes focused on the
management and on operations, particularly with respect to
Separation of Audit Committee and Risk Management
Committee: While OSFI recommends a risk committee that is
separate from the audit committee, OSFI recognizes that in smaller
institutions, both risk and audit functions may be performed by the
same committee. Such a committee will need to think about issues
from the perspective of both audit and risk. A practical suggestion
to ensure neither perspective gets overlooked is to create separate
agenda items by audit committee topic and risk committee
Stephen's practice focuses on financial
institutions and corporate finance.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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