I have no doubt that sometime during the last week of December every one of us came across a broadcast of the 1946 American Christmas classic "It's a Wonderful Life."  I couldn't resist the temptation to draw analogies and build a bridge to today.

George Bailey, in my view, has a lot to teach us about the ongoing basic risks faced by financial institutions.  Even though he ran the family Building & Loan in a small town in the 1940s, he had many of the same risks and consequences community-based institutions see today.

On Christmas Eve, Uncle Billy is tasked with transferring $8,000 of the Building & Loan's cash to the villainous Henry Potter's bank. Billy carries the deposit himself, and even stops for coffee. Any chief risk officer watching the movie knows this won't turn out well.

Uncle Billy gets distracted as he teases Potter about a story in the newspaper. Potter winds up with the newspaper, inside of which Uncle Billy has carelessly left the cash. Of course, Potter keeps it knowing the missing funds will create bankruptcy for the Building & Loan and an arrest warrant for George Bailey. A major threat turns into devastating consequences as the Building & Loan becomes insolvent, regulators and the press are on the way, and George's reputation may be tarnished for years.

So a day's cash deposits in a modern bank won't lead to bankruptcy, but let's focus on people, process, and technology.

People today have no fewer foibles than people of previous generations.  What we know today is to create checks and balances using operational and technology controls to prevent and detect errors and omissions. Additionally, it can only be assumed that George may not have appreciated the risk to himself and the Building & Loan if the $8,000 was lost and never reached Potter's bank.

Today we know that a risk assessment should have revealed a threat that can kill the franchise.  Since the beginning of 2008, approximately 490 institutions had assets of similar proportional value where the value was lost and the bank failed. Also since 2008 the Federal Deposit Insurance Corp. has initiated litigation against directors and officers of approximately 76 institutions.  The CEO was named in 88% of the cases and the chief risk officer none. These institutions didn't have Clarence the angel or a CEO so loved as George that the community rallied to bail him out, and they weren't practicing risk management effectively enough to survive.

Even though institutions represented by the nostalgic Building & Loan no longer exist, neither does the banking industry of 2007.  Throughout 2013 I visited with hundreds of bankers and I see very clearly that the spirit of the Building & Loan is alive and well today in almost 14,000 community banks and credit unions.  And even with today's more sophisticated approaches to risk management and modern tools to assess and manage risk, the spirit and mission of community banking is as strong today as it was in George Bailey's world.

Michael Cohn is the director of the WolfPAC Solutions Group at Wolf & Co. PC.  He provides enterprise risk management advisory services and board training to community based financial institutions.

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