Just as with diet recommendations, moderation needs to be the new motto for credit risk management. Diets provide for the occasional bag of chips or dessert after dinner, but these same food items become problems if the small quantity or occasional indulgence suddenly becomes the norm.
Similarly, we, in our risk management efforts, put forth guidelines that establish limitations on certain loan types or categories that have been deemed risky should the numbers or quantity become too large a part of the overall portfolio. Unfortunately, we have a tendency to allow earnings or portfolio growth to cloud our judgment and take an attitude of “just one more.”
In the past several years, we have experienced excesses in commercial real estate, residential development and subprime mortgages. It is now these excesses that are creating the problems that we are dealing with today.
Bringing back these limitations – in other words, reestablishing the discipline in our portfolio risk management – will go a long way in avoiding these same problems in the future.
As I learned early in my banking career: “…soundness, profitability and growth…in that order.”