Strategic Planning Means Managing Tradeoff between Risk and Return: FDIC

August 2015

Strategic Planning Means Managing Tradeoff between Risk and Return: FDIC

The Federal Deposit Insurance Corp.’s latest issue of Supervisory Insights explores how banks should handle strategic planning “in an evolving earnings environment.” 

Written by the FDIC’s policy staff at the division of risk management supervision, the article notes that “the return of loan growth and an uncertain future interest-rate environment pose important strategic questions” for bank directors and managers. 

“Strategic planning involves setting the direction of the bank and the broad parameters by which it will operate,” the Supervisory Insight article notes. “Doing this is a basic responsibility of boards of directors, with the assistance of executive officers. Indeed, setting the strategic objectives and future direction of the bank is a key theme running through FDIC guidance regarding corporate governance and is the initial step in a sound governance framework.”

The writers suggest that banks need “a disciplined approach” to identifying opportunities and quantifying

risks. It advises banks that they must manage “the tradeoff between risk and return,” making sure that “capital, earnings and staff expertise” have a reasonable correlation” to a bank’s risk profile. It would be wrong for bankers to manage to earnings targets without taking into account risk, the article warns.

All the prudential regulators have been focusing on effective strategic planning lately; the Office of the Comptroller of the Currency has listed it as a supervisory priority. (See the June issue of Bank Insights for more information).

Note: Invictus has developed proprietary forward-looking risk analytics (FLRA™) that focus on portfolio risk/reward. These new analytics, which are integrated with stress testing and capital planning, are an essential part of Invictus’ strategic planning advisory services.