Want to Save Banks? We Need Fewer 'Supermen'
Five years on from the collapse of Lehman, we are awash in retrospectives. And opinion leaders’ views around the key topics have gelled: “We are at risk of another financial crisis.” Or, from a Wall Street exec, “The probability of it happening again in our lifetime is as close to zero as I could imagine.” Dodd Frank is a strong piece of legislation; Dodd Frank is awash in details that don’t get to the core of the issue. We’ve taken care of the key risks; no, systemic risks remain.
The two sides have even gelled around their views on the fundamental cause of the crisis. On the one hand, the media and public at large point to greed as the underlying cause (of which there was and is certainly plenty). On the other end of the spectrum, on Wall Street itself, the conversations revolve more around the implicit view that the failed companies were felled by their CEOs’ fatal leadership flaws: one was arrogant, one was isolated, one (allegedly) smoked pot, one was a lawyer, one did not have the savvy of his predecessor.
We will never rid the industry (or any industry) of greed. Nor should we accept that the CEOs of the large financial institutions have to be “just right” supermen in order to steward their companies – and, by extension, the economy – safely. We want our institutions to remain safe even when the Boards make the wrong choice – as even the most well-meaning of them can – and their guy isn’t smart enough, or fast enough, or forward-thinking enough.
One solution: research study after research study indicates that the smartest management teams and Boards have diverse experiences and backgrounds. Boards should therefore increase the IQ of their teams by using this lever; in doing so, they will reverse the pronounced trend since the downturn of senior management teams becoming more homogenous….and thus even more prone to “groupthink” than the teams in place leading into it. (I have worked with more diverse and more homogenous teams in my career, and the difference has been striking.)
That said, the ultimate solution must always be for financial services companies to hold enough capital to cushion potential losses. All roads must lead back to this. Case in point: money funds. Risk levels? Not much. Capital? None. Impact of money fund losses on the financial system? Potentially catastrophic. Reforming money funds, then, stands as unfinished business, even if their risk levels are not enormously high, because the stakes are so large.
The key question that remains – and that must continue to be the focus of the bank stress tests – is how well banking risk and capital cushions match up. While the banks have lower risk and more capital than they did in 2008, only time and some bruises will tell if the capital is enough…..just in case this crop of bank CEOs and management teams fall somewhat short of perfection.
Photo: E+ via Getty Images
Postgraduate Researcher at Anglia Ruskin University
11 年Returning to this article by Sallie Krawcheck, I am struck again by how true her comment on diversity is : "..research study after research study indicates that the smartest management teams and Boards have diverse experiences and backgrounds". Diversity is not the whole solution, but a diverse team makes you a more likely to find the right solutions.
As Your Personal Concierge of Ideas and Possibilities, I bring 40 years experience as a retired Architect & marketing consultant who’s worked in a variety of industries by helping clients save money with their business!
11 年Want to save banks? Hire a licensed architect and put that person to work reviewing the pro formas that are needed whenever developers or other business owners are asking for money to build new or renovated buildings. Why should you do this? Well, I once knew of a developer who approached a commercial banker for a $1 Million loan to build a building. The banker said to the developer, "bring me a pro forma that contains an accounting of why you need $1 Million dollars and a set of drawings indicating what this building is to be. The developer went back to his office and easily produced a business plan profile for the new building's use. But he didn't have any drawings for the pro forma. The developer then went about setting up a set of building construction documents comprised of : a site plan for the new building, 1st and 2nd floor plans from another building, exterior elevations from a third building, one-story wall sections from this third building - Note: the new building was actually two-stories in height - and rolled up the drawings and presented them, along with the business plan, to the banker for the loan. The banker reviewed the business plan and drawings and gave the developer the loan. What went wrong here? The banker knows how to review business plans but he or she has no knowledge whatsoever on how to recognize a con-job when it comes to building design. This is where a licensed architect can come to the rescue and be the bank's SUPERMAN! or WONDER WOMAN!
Relationship Manager at Heritage Bank
11 年Mark: you are correct. But losses are generated by taking risk also. A bank makes a loan when risk is low to moderate, generally considered acceptable. Excessive risk is an investment, not a loan. These people either couldn't properly identify the risk or they knew the risk and made a wrong decision. The consequences, or personal risk to them as individuals, apparently wasn't great enough to deter them from making a bad decision.
Senior-Level Treasury Operations Expert
11 年Let me pose a few questions to everyone. If you could build the perfect financial system in which we would never face an event like this again what would it look like? How would manage and regulate it? How many regulators would you have? Lastly where in the world could you point to and say ahh this is the banking/financial system we should have to avoid this ever again.