Risks Associated with Mortgage Banking: Strategic Risk

Posted on April 13, 2009
Filed Under Mortgage | Comments Off

Risks Associated with Mortgage Banking: Strategic Risk Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions. This risk is a function of the compatibility of an organization’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against those goals, and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, delivery networks, and managerial capacities and capabilities.

In mortgage banking activities, strategic risk can expose the bank to financial losses caused by changes in the quantity or quality of products, services, operating controls, management supervision, hedging decisions, acquisitions, competition, and technology. If these risks are not adequately understood, measured, and controlled, they may result in high earnings volatility and significant capital pressures. A bank’s strategic direction is often difficult to reverse on a hortterm basis, and changes usually result in significant costs.

To limit strategic risk, management should understand the economic dynamics and market conditions of the industry, including the cost structure and profitability of each major segment of mortgage banking operations, to ensure initiatives are based upon sound information. Management should consider this information before offering new products and services, altering its pricing strategies, encouraging growth, or pursuing acquisitions. Additionally, management should ensure a proper balance exists between the mortgage company’s willingness to accept risk and its supporting resources and controls. The structure and managerial talent of the organization must support its strategies and degree of innovation.