Executive Summary: Internal silos contributed significantly to the banking crisis. Breaking them down will be critical for banks wishing to reconnect with their customers and rebuild stable revenue streams.

 

 

Gillian Tett, columnist for the Financial Times, recently wrote about the impact of organizational silos on the problems and ultimate destruction of Lehman Brothers. She recalls a section from a recent Lehman “tell-all” book in which during the fall of 2008:

 

“Its own fixed income department was already so alarmed by the real estate market that they were trying to go ‘short’. But, while one department of Lehmans was exceedingly bearish, other departments, such as the mortgage securitisation team, were aggressively bullish — and the different departments were in such rivalry, that they barely communicated, let alone co-ordinated.”

 

Silos Dominate
The above depicts silo-suicide at its most extreme, but our experience in financial services suggests silos are the norm rather than the exception across the industry. While sometimes obvious and in other cases more subtle, a silo mentality often dominates whether related to line areas or support personnel. Some examples:

 

• A large lender in which one division will not speak to another division about a particular segment since they both target that group; rivalry rather than cooperation dominates

 

• A regional bank in which the head of small business credit claimed to not know the name of his counterpart responsible for deposits

 

• The head of a major finance company who stated that he wanted people in one of his specialized divisions to sell only one product and ignore other opportunities

 

• Retail bankers who hold onto their high-balance customers, protecting branch balances rather than transitioning these customers to a specialty group

 

• Middle market bankers who maintain small accounts rather than shift them to a small business group

 

• Another regional player in which lenders and wealth management personnel keep opportunities from each other, protecting “their” clients

 

• Information Technology executives who speak in buzzwords rather than English and, in some cases, deliberately fail to communicate straightforwardly with senior management

 

• Senior managers who go around the organizational chart to hold one-off conversations with business line leaders, undercutting the management chain

 

Frankly, the list is almost endless and extends well beyond trading and investment banking (easy targets for a silo discussion) to virtually every area we have worked in over the years. My first experience with silos in banking was when I began my career at Citibank decades ago. I had a client who needed assistance from one of our European banks. My distinct memory was that I would have been better off calling Deutsche Bank than trying to work through Citi’s bureaucracy and disinterest. Of course, Citi’s silos appear to remain intact with the recent Phibro sale underscoring that many fiefdoms remain.

 

 

Tribalism Allowed to Proliferate
Bank management, either inadvertently or deliberately, has allowed what Gillian Tett terms “tribalism” to grow, in many instances becoming the cultural norm. Lehman Brothers as well as other trading and investment banking explosions illustrate the potentially cataclysmic impact of silos. However, their effect in commercial banking, while usually not as pernicious, undercuts customer relationships, profitability, and culture.

 

For example, one of the reasons that the small business effort is under reconsideration at many banks is that bankers in this area, despite all economic evidence and common sense, year after year continued to emphasize lending as their lead product. Yes, most small businesses do not borrow; yes, deposits are “risk free”; yes, some loans inevitably go sour. Nonetheless, many bankers focused on the most volatile and, we think least profitable aspect of serving a small business. Why? In some cases, deposit/cash management reported to another area of the bank; in other instances, compensation encouraged a silo, pushing the small business banker toward loans versus deposits; in still other instances, a knowledge silo existed, whereby, the business banker lacked a sufficient understanding of cash management offers and, therefore, avoided selling them. The reasons need to be understood; more importantly, they need to be overcome.

 

Breaking Silos
It is relatively easy to chronicle the existence and extent of silos in banking. They have been around forever and unless management takes action will remain in place due to human nature and inertia. Breaking down the silos takes leadership and time but banks often lack the leaders necessary to do so and fail to commit to the time required to change culture.

 

Dick Kovacevich, about to retire from Wells Fargo, began to address this area when he was running Norwest twenty years or more ago. In one speech, he directly confronted bankers who were not bringing their colleagues into cross-sell opportunities. Basically, he demanded that employees think like one bank rather than individual departments. And, while Wells is certainly not perfect, it and a handful of other large banks operate largely as one rather than a series of islands.

 

What breaks a silo?

 

• Leadership from the top (as noted above) is step one

 

• Appropriate compensation is also critical. If your compensation encourages silos, silos will abound

 

• Shifting personnel from one area to another to encourage cross-fertilization

 

• Leadership (repeated because it is the key to the puzzle)

 

We know one bank in which senior management is likely to penalize or even fire bankers who keep critical information or clients to themselves, who in effect view themselves as an island. That approach seems to work, as this is an area in which subtlety may not.

 

Tett mentions that there is a new fad among regulators: “macro-prudential surveillance” (essentially a posh word for active, holistic regulation) that is meant to allow banks to better understand exotic investments and loans. However, she also notes that innovation can create silos, as products become more specialized and often indecipherable to non-specialists.

 

Concluding Thought
To some degree, silos will always exist. However, the harm of silos can extend well beyond missing a potential cross-sell to undermining the core stability of an FI. Allowing silos to thrive has done economic harm to banks for decades; if now is not the time to confront this area and resolve the issue, then, when?