Risk Tolerance Drift

Risk tolerance rarely changes in a single decision.

More often, a series of reasonable decisions gradually changes what feels normal.

Season 3, Episode 9 examines how strong performance, experience, and confidence can quietly move the boundaries inside a well-run community bank—and why those changes are often easiest to see only when today's decisions are compared with those made several years ago.

The question isn't whether today's decisions are defensible.

It's whether they would have felt just as routine five years ago.

Transcript

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The first change barely registered. The bank had performed well in a particular lending segment for several years. Losses were low. The team understood the credits. During a credit strategy meeting, management proposed a modest increase in exposure limits. One executive explained it simply. We've built experience here. The change made sense and it was approved. Six months later, a similar conversation took place around another portfolio. Again, the adjustment was modest. The bank had performed well. The team was comfortable with the risk, and that change was approved too. A few years later, I was sitting in another meeting at the same institution when a director said, We've proven we can operate at this level. He was right. What caught my attention was the phrase this level, because this level wasn't where the bank had started. There had been no moment when the board decided to become a different kind of institution, no significant change in philosophy. Just a series of reasonable decisions made under favorable conditions. Each one made the next one easier to consider. I've heard the language change in other institutions too. We don't really consider that high risk anymore, or we're comfortable there, or we've done this before. None of those statements sounds particularly consequential. But listen to them several years apart and they can tell you something. A CEO once described it to me this way. If you asked us whether our risk appetite changed, we'd say no. Then he added, but if you compare our current thresholds to a few years ago, they aren't identical. He wasn't expressing concern, he was simply looking backward. And that's often when these changes become the easiest to see. Not while the individual decisions are being made, but later, when today's normal is compared with yesterday's. I remember one board discussion where an older policy document happened to be included in the meeting materials. A director began comparing several of the historical limits with the current ones. After a minute or two he looked up. We used to spend a lot more time talking about these. Someone across the table said we also know a lot more now. Both statements were true, and the conversation continued. That's what makes risk tolerance difficult to observe in real time. Experience should change judgment. Good performance should build confidence. A capable team should earn greater latitude. But eventually, a board can find itself operating comfortably in places that once required considerably more discussions. Not because anyone decided old boundaries were wrong, they simply were less visible. And perhaps that's the comparison worth making from time to time. Not whether today's decisions are defensible, most of them probably are, but whether the decisions that now feel routine would have felt equally routine several years ago.