By Kathie Beans

Key Corp CEO Beth Mooney said high unemployment and housing values are dampening consumer confidence, hampering a recovery, and taking a toll on the financial services industry. Continuing uncertainty adds to the strain of an industry still cleaning up its credit quality.

The keynote speaker also said the extended low-rate environment, the reduced value of deposits and weakened loan demand may indicate permanent shifts in the marketplace.  “We’re seeing consumers and companies de-leveraging and their behavior, perhaps, is changing forever.  They’ve lost trust in financial institutions.” 

As investors step away from the financial services sector, further pressure is placed on the valuation of the industry. “All of the things that make it a challenge for us to manage – like banks looking for asset growth in a period where there is nearly none – make financial services appear to be an undesirable near-term investment alternative,”  she said.

Mooney also noted that the strong government and regulatory response to the crisis has resulted in reduced revenue pools, increased capital requirements, and an increased cost of doing business. 

“With the environment so challenging, we all have to get smarter about how we run our businesses,” she said. “And the biggest lesson from the last crisis is that we have to be grounded in the balance of risk and reward.  More than ever, you’re not creating the operating margin at which to absorb risky decisions. You’ve got to manage your business from the foundation. The cornerstone has to be your risk profile and your credit risk.”

The previous crisis taught the industry that risk is bigger than just credit risk. It is strategic risk, reputational risk, operational risk, and compliance and regulatory risk. “Different forms of risk presented themselves everywhere,” she said.

KeyCorp used the lessons learned as an opportunity to completely re-evaluate its approach to risk, and it developed four pillars of risk management.

1. Achieve and sustain strong first and second lines of defense in risk management practices. The first line is those closest to the customer with the tools, training, and knowledge to make good decisions. The second line is the experienced risk professionals. The lines work in tandem to balance risk and reward in real-time every day. 
2. Help the businesses generate profitable revenue growth, achieve strategic priorities, and manage risk at acceptable levels. The Risk areas play an integral and prominent role in helping the businesses to generate growth while managing risk. Risk’s support results in risk-reward decisions that generate shareholder value and ensure strong reserves, capital, and liquidity.
3. Further integrate risk, strategic planning, performance management, and capital planning activities. Continue to enhance stress testing processes and scenario analysis to support capital management and strategic planning. Risk streamlines its risk assessment processes and activities.
4. Improve risk information and data at an enterprise level to ensure clarity of the reporting necessary for decision making and monitoring. KeyCorp has developed a technology roadmap for risk to support its data, analysis, insights and conclusions while also striving for simplification and clarity. 

Mooney said other improvements to risk management at KeyCorp include the creation of an enterprise risk appetite framework, the establishment of an enterprise risk management committee, and the creation of a strong risk culture.

In this time of volatility, Mooney believes near-term shareholder value will be driven through focused execution, credit quality, disciplined cost management, and prudent capital management.

Longer term, she believes value will be levered to the economic cycle and driven by share growth, asset growth, and higher interest rates.

In this slow growth economy, the industry is “banking the hard way,” said Mooney. She added that the industry has an important role to play in the economic recovery of our country. “And to fulfill that role, we have to become a stable and robust banking system by maintaining our capital, liquidity, and risk management discipline.  I think we have an obligation to the economy, to our industry, to our shareholders and to our employees.”   

Look for more of Beth Mooney’s remarks in an upcoming issue of The RMA Journal.