The economy we are still suffering through will eventually bottom out and begin to turn up. (We all hope.) However, the future banking environment will be increasingly volatile and complex. In the past, many banks operated with what we consider lax approaches to decision-making, including: committee-driven decisions rather than establishing clear accountability, tolerance for internal silos, inadequate analysis to support decision-making, poor linkages between performance and rewards, and lack of urgency. While those approaches did not work well in the past, they will be disastrous going forward.
The British Perspective
Quentin Wilson, a UK-based writer, recently wrote a column for the British magazine, The Spectator. While he hardly intended to do so, in commenting acerbically on business leadership more broadly, he also portrays many of the leadership issues that impact U.S. banking. While his words are harsh, they are hardly unfair:
“It used to really bother me. Sitting in what I thought was the presence of greatness, I’d leave hugely underwhelmed…Heads of car companies, television commissioners, private sector chief executives, council bosses and entire government departments all seemed to speak in language strangely detached from meaning…There are too many shysters in jobs they can’t do. Here’s a dirigible-sized truism: much of our current economic malaise is directly due to the bad decisions made by these Muppets. Risks that shouldn’t have been taken, money that never should have been lent, assets that were deliberately overvalued and company accounts that sailed close to fraud. We’ve had a decade of seedy mediocrities who have clambered high up the career rope-ladder using CVs [resumes in the U.S.] stiff with lies, deceit and astonishing amounts of arrogant self-belief…and they’re still here. They’re not going away, they’re not being made accountable, and they’re still wasting our time with their nonsense.”
Obviously, these are tough, and perhaps injudicious, comments which, nonetheless, raise important issues to consider: What type of managers do banks need to operate in the post-downturn environment? What steps should Boards be taking to prepare their banks for the future? What risks exist if changes do not occur?
Increased Volatility is the New Norm
While, in most cases, corporate America remains in the power of the leaders who directed it into an economic crisis, the financial world has become increasingly volatile and unpredictable, requiring managers who anticipate rather than react. Gillian Tett, a Financial Times columnist, wrote recently that we are suffering from what she termed a post-traumatic syndrome in which the financial world has changed dramatically from having previously been a “pretty stable, predictable place.” Prior business models that “appeared to link credit growth, economic expansion, and monetary policy with reassuringly neat precision no longer look reliable.” Quoting a Wall Street analyst she writes that, except for the short term, “who knows” should be the mantra for investors and by extension for business heads.
Just in the last week media stories point to the uncertainty of the future:
* Bank of America is closing 10% of its branches, indicating that, for more of its customers, using alternative channels is becoming the predominate way to conduct banking
* Loans are declining, as some lenders pull back and borrowers become more cautious
* Many lenders are building their C&I lending capabilities as they reduce their reliance on commercial real estate (CRE) lending
* The future of CIT, once a highly regarded lender, remains in doubt
* CRE-related problems are accelerating fast
* On the capital front, Webster Bank has just sold up to 15% of itself to a private equity firm (PE), indicating continuing involvement of non-traditional investors in banks
* On the personnel front, more senior bankers have moved to Private Equity firms; most recently Mike DeNoma of Standard Chartered moved to KKR
A few short years ago, it was difficult not to make good returns in banking; today, the opposite is true.
Frozen or Managing Actively Through the Inflection Curve?
Reacting to the “traumatic” economy, many managers seem to be suffering from traumatic shock syndrome, unable or unwilling to take proactive steps to get out of their trenches and begin to move forward:
* Many banks have made decision-making more cumbersome in light of the downturn; remarkably, at these banks increased “consensus” (roughly translated as CYA) is required
* Not making a decision is widely viewed as safe and more likely to preserve one’s job versus the potential negative impact of making a wrong move
* Growth opportunities are overlooked or delayed, since management seems unable to commit to new paths while continuing to deal with existing problems; the “good” businesses are being held back by the laggards
* Optics and concerns over image seem to have taken increased prominence over substance
We have written previously about the Inflection Curve and the need for management to determine its position on that curve and take actions accordingly. The banks experiencing continued declines have no choice but to do so, as they fight to survive. However, those banks that have maneuvered through the worst of the downturn and can validly look for growth opportunities are failing to do so.
Why? In part, corporate reticence results from a continued hangover from the downturn. In other cases, banks that lacked a detailed strategic approach before the crisis not surprisingly lack a strategic foundation coming out of it. Defining and executing on a coherent strategy is not a luxury that a company can eliminate in bad times, much as an individual drops purchases of expensive wine or trips to the mall.
In our next newsletter, we will look at specific initiatives that bankers should be taking in one key area that many are now ignoring or underplaying, small business banking.