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Spreadsheet concerns in risk management: Complexity

Sageworks
July 18, 2013
Read Time: 0 min

For decades, financial institutions have utilized spreadsheets as a primary tool in the effective management of risk. However, an over-reliance on spreadsheets has become an area of serious concern among regulators. Some of the apparent benefits are often shadowed by underlying, significant risks. Complexity is one of the major concerns regularly voiced by regulators to financial institutions during examinations.

Spreadsheets are capable of tracking the most basic data or completing complex calculations, such as the allowance for loan & lease losses (ALLL), which may span across over 40 different spreadsheet tabs, all interconnected with one another.

While the flexibility to create complex worksheets is a benefit, trying to do too much and getting too complex is certainly a concern of regulators. The more complex a spreadsheet, the more susceptible it is to potential error. In addition, it can be more difficult for secondary users to follow and interpret the data or to provide back-up in the primary user’s absence. 

A Sageworks consultant mentioned in a recent video that having multiple spreadsheet tabs, formulas and files can cause problems for examiners. “Rather than the examiner getting to spend time actually reviewing the ALLL analysis, they have to check formulas and verify that the calculation is correct. It takes away from the examination time.”

Although it’s generally best practice to “keep it simple”, there are instances in which a specific task may require more intricate spreadsheets. Here are some recommendations for these instances:

1) Establish and document formal policies and procedures outlining step-by-step details on maintaining the spreadsheet.
2) Ensure consistency and, thus, allow users, management and/or regulators ample opportunity to familiarize themselves with the complexity.
3) Keep other potential users in mind during creation and updates.
4) Document any changes when appropriate.
5) Consider alternative options, such as an automated web-based solution, to reduce manual errors and increase efficiency.

For more information on common concerns that regulators have with spreadsheets, download the whitepaper titled: Regulator Concerns with Spreadsheets in Risk Management.

About the Author

Sageworks

Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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