Could a Bank’s Best Asset to Perform Stress Testing be in HR?

It is no doubt that stress tests for the nation’s largest banks can be an anxiety-inducing experience for those institutions being reviewed. Since the passing of Dodd-Frank, more than 30 megabanks are in the hot seat annually while their ability to withstand the financial stress of dynamic shifts in the economy are assessed. The most senior risk management executives at these institutions are under the spotlight, both in the industry and in the media.

So when late last month Bank of America announced a management overhaul that directly impacted this important review, it left some in finance scratching their heads. As part of the executive shift, Bank of America named Andrea Smith, their head of human resources, to the newly created role of chief administrative officer, a position that would take control of the bank’s stress testing submission to the Federal Reserve. Per a recent article in American Banker, some in the banking industry took to Twitter to express their confusion in passing a high-profile responsibility typically reserved for a CRO or CFO to the human resources lead.

But the article goes on to point out that it might not be such a leap for an HR professional. Dave Ulrich, business professor at the University of Michigan, explained that while many people still see the HR function as managing a company’s benefits and retirement plans, today the person filling that role is often a prominent leader, as well as being deeply entrenched in what makes the company tick. Many HR executives are responsible for helping company leaders “articulate goals and set the culture,” he noted in the article. In Ulrich’s research, he found that a CEO has far more in common with the high-performing chief human resource officers than with CFOs or CROs.

He noted in the American Banker article that, “If [Smith’s] a good business person who knows finance, strategy, marketing and operations, and happens to work in HR, then it’s a good move.”

And that may very well be the case. For example, as head of HR, Smith managed a budget of $35 billion with oversight over more than 220,000 employees in 40 countries.

This executive shift at one of the largest banks in America begs the question – Is Bank of America onto something? While the pressures of a public megabank stress test are unique in many ways, the notion of marrying HR and compliance doesn’t sound so strange. Human resources pros are required to be compliant in state and federal laws, and they often receive some form of training to do so.

For banks of any size, the practice of stress testing goes hand-in-hand with compliance. It’s a critical tool to conduct formal concentration or portfolio assessments to ensure a bank’s capital will be adequate under various scenarios. In fact, according to results from a 2015 Abrigo Bank & Credit Union Exam Survey, more than 40 percent of the 180 institutions polled had already begun stress testing, and it was recommended to 30 percent that they begin stress testing or expand current their practices per their most recent exam experience.

Could looping in HR become a common thread throughout the industry when it comes to compliance-specific practices? If a chief administrative officer proves successful for BoA, other like-sized megabanks could follow suit. For smaller banks, though, consulting with HR on stress testing could offer a new take on procedures or even results. An “outsider’s” perspective could help improve the process overall.

It may not make sense for every bank to pass stress testing to their HR specialists, especially those HR execs with limited financial insight, but a new set of eyes could be a positive asset to a critical banking practice.