As we celebrated President’s Day this week, I find myself reflecting on the WBA Bank President Conference in January. WolfPAC Integrated Risk Management attended and sponsored this event, held before the historic cold took hold of 80% of the country.
While listening to Jelena McWilliams, Chairman, FDIC provide insights on the direction of the agency and the banking system, it occurred to me that this is a uniquely challenging time for bank executives and risk officers, as the current economic expansion may soon reach its end, and we may be presented with a looming recession.
We know what caused bank failures in 2007 and 2008—but what will cause a bank’s downturn in the 2020s? If we have enough capital when this happens, will we be okay? Almost every executive provides the following answer: “We need the minimum statutory capital + a strategic buffer + a ’keep the regulator’s happy‘ buffer + an ’I sleep well at night‘ buffer. Simply put, you can’t have enough”.
Ambiguity and the unknown are common barriers to action. But what if we can monetize the potential impact loss from the threats and risks to our business model, add a strategic buffer, then ask what we should do with the excess? Investing during a recession is counter-intuitive, but a viable and historically successful strategy. In a 2009 study, the Kaufman Foundation found that well over half of the companies on the 2009 Fortune 500 list, and just under half of the 2008 Inc. list, began during a recession or bear market. My takeaway is that recessions are a time to be ultra-entrepreneurial and invest capital, as this historically is a period of plentiful and less expensive resources. It also means that analysis and planning needs to be performed in the time period leading up to a recession—a time potentially like right now!
Another takeaway is that capital in our country isn’t flowing effectively. The issue de jour at every bank conference and economic update is deposit gathering—small markets and economically stressed areas can’t support the deposit need. The FDIC appears interested in revisiting the approaches surrounding brokered deposits to support capital and economic growth.
The third takeaway, which incidentally might not surprise anyone, is the lack of a ’business process efficiency strategy‘ to increase scale in compliance for IT, BSA, and AML. An expectation exists across the industry to enhance these programs, but more trained people are needed to perform this work. Strategizing on executable processes now will allow for a timely, maximized return on investment.
Although history’s most famous scientist, Albert Einstein, was not a bank president, he said, “We cannot solve our problems with the same level of thinking that created them.” I never had the privilege to be a famous scientist (nor a bank president), but my contrarian tendencies, which most likely evolved from my argumentative personality as a child, makes me channel Einstein and wonder if waiting for conventional wisdom to emerge is not a winning strategy.