In April 1984, I started my first job at the First National Bank (FNB) of Whitehouse; a small ($40 million asset), family owned community bank in Whitehouse, TX. Over the next eighteen years, I applied the broad skillset I had acquired and helped transform that small financial institution into Austin, Bank, N.A. with over $1 billion in assets and 32 locations across East Texas. The knowledge I gained at institutions like Austin Bank and in other key positions I’ve held over my 35-year career honed my expertise in practically all areas of community banking. While this does include regulatory compliance, in the broader sense, through hands-on experience (and trial by fire), I gained the necessary insight that allows me to help institutions manage risk enterprise-wide.
As a risk management professional, I chose to use my experience to help financial institutions that have decided to serve cannabis-related businesses (CRBs) develop compliant programs.
Since my time here at Green Check, I’ve had the opportunity to work with banks and credit unions of various asset sizes, charter types, and different risk profiles. Working with these financial institutions (FIs) has given me a unique perspective into the diverse strategic objectives and desired benefits (i.e., rewards), risk mitigation efforts, the business lines impacted by the decision to bank CRBs and last but not least - the affected policies, procedures and processes.
Having the opportunity to work with numerous financial institutions has not only allowed me to see the differences in their approach and thought processes but also, the emergence of a common trend: the myth that banking CRBs primarily only involves and increases the risk related to BSA/AML.
Banking CRBs is more than BSA/AML
Of course, all CRB programs must take into account the BSA/AML related risk and how to incorporate the mitigating controls necessary to reduce your FI’s overall exposure to an acceptable level. You may not have considered the direct impact cannabis banking has on another area of risk that can have an adverse impact on your institution if not effectively mitigated: liquidity risk.
Every institution should address liquidity risk in connection with its CRB program. For the most part, liquidity risk can be managed and mitigated by establishing deposit concentration thresholds and a documented exit strategy that can be executed if circumstances arise which require the divesting of all CRB related accounts.
Several factors can cause liquidity risk to shift the risk-reward scale toward an unfavorable balance if it is not properly addressed. I’d like to focus on one factor in particular - an institution’s asset size.
CRBs are highly cash-intensive businesses. This, combined with the fact that the bulk of their funds (if not all of their funds) will be placed into non-interest bearing commercial accounts, presents an opportunity for new, low-cost deposits. While this shouldn’t be the only reason for banking CRBs, for institutions looking to boost liquidity, it can be an enticing incentive.
For smaller institutions, this rapid growth in deposits can result in liquidity risk that does outweigh the reward. CRB accounts can quickly increase the total core deposits by a substantial amount. In turn, the increase in deposits typically correlates to an increase in non-interest fee income and obviously an increase in the institution’s total liabilities. This leads to the question of how an institution will offset the increase in liabilities on the asset side, which is now involving the complex world of Asset Liability Management (ALM) and not AML.
Managing the Risk
As with any type of risk, with the right expertise this is manageable. The failure to plan for such rapid growth in liquidity is plan for failure. The good news is that failure can be avoided.
This is where Green Check, as a company can help. We offer the only automated solution that helps financial institutions manage and ensure compliance with BSA / AML requirements. Moreover, our Cannabis Compliance Management System gives FIs the ability to more closely monitor the volume and velocity of CRB deposits in order to manage liquidity risk and adhere to the concentration limits each institution sets forth in their cannabis program.
Technology alone isn’t enough to ensure your CRB program is successful. The key to a successful program is the combination of technology and people with expertise in enterprise-wide risk management that can help your institution develop a program from start to finish that is tailored to your specific needs and risk profile.
Schedule a demo to learn more about how Green Check can help you manage your cannabis banking program today!