This is indeed unfortunate news for our European members who are struggling through a deep recession. We all realize that the sovereign debt crisis presents serious challenges for global banks in North America, but it would be a mistake to think that the impacts of this crisis are limited to the large players.

This is a crisis that impacts all of us, whether we’re managing risk at a trillion-dollar bank in North America or at Main Street Bank in Small Town, USA. The world is flat, as Thomas Friedman famously says in his best-selling book by the same name. Even if we don’t have customers overseas, our customers at home may be impacted either directly or indirectly by events on the other side of the Atlantic. In this interconnected world, your customer in Kansas City could be impacted if its revenue sources depend on one or more customers with significant European exposure.

To mitigate the risks that sovereign debt may present to your portfolio, consider the impacts of the following: a strong dollar, weak capital markets but higher capital requirements, and political and regulatory pressures. Stress testing and scenario analysis will give a community bank a better understanding of what it may mean to its portfolio if, say, its steel manufacturing customer loses a third of its revenue from its European-based customers.*

As the dollar emerges stronger during this crisis, U.S. consumers will enjoy lower-priced imports. But your customers who export, and those with significant investments in the euro zone, may experience negative impacts to earnings and investments.

Liquidity strategies should be reviewed in light of the current situation. If you need to fund your institution in the capital markets, you may run into difficulties. Banks with a strong retail customer funding base are more fortunate. The interbank money market will remain credit-sensitive. Counterparty risk management will become increasingly important, and institutions will need to have accurate and timely exposure information and management systems in place.

Also, expect higher capital requirements from regulators on both sides of the Atlantic and from the markets. Those requirements will reduce management’s ability to use leverage, impacting banks’ ability to grow loan volumes, already a challenge in this economy. Political pressure to keep credit flowing will continue.

You can expect also that regulators, rating agencies, and securities analysts will scrutinize the quality of the data used by management in decision making. The annual RMA/AFS Data Quality Surveys continue to show that the industry is far from satisfied with the quality of data used in the credit and portfolio management processes.

A frequent refrain of RMA is that the foundation for strong enterprise risk management is the institution’s risk appetite. Having a well-defined risk appetite that is understood by everyone in the organization is a crucial risk management practice that will help mitigate your risk from this or any other crisis.

This is also a good time to review your operational risk management. Strong operational controls will improve your bottom line through reduced losses, higher productivity, and improved product quality and customer satisfaction.