Keeping things in Perspective
The last few years have certainly been a difficult time for the financial industry, as well as the United States and world economies. The sub-prime fiasco has been compared to the great depression and the final chapter of this story is yet to be written. History will eventually provide us with a rear-view mirror someday, and perhaps we can then put it all into better perspective.
We as humans have a habit of thinking when bad things happen that what we are experiencing are the worst of all times. However, a look at other past events may prove otherwise.
DORIS KEARNS GOODWIN
I’m reminded of hearing the noted author and historian Doris Kearns Goodwin speak at a conference a few years after 9/11. She was asked if the event of 9/11 was the worst time in history. She slightly smiled as she thought about her answer and said, “No, 9/11 isn’t necessarily the worst event in history. It only seems that way to us as we live through it in real time, and don’t yet have the benefit of knowing the ultimate outcome which history will eventually answer.”
She went on to say, “Imagine the uncertainty George Washington and his army felt fighting the British with the ultimate independence of what we now know as the United States of America at stake. Imagine how Abraham Lincoln felt at the beginning of the civil war, worried that the country as he knew it might not survive. Imagine how unemployed and bankrupt citizens felt after the great depression of 1929 wondering whether life as they knew it would ever be the same. And imagine how the world felt in the late 1930’s, not knowing that Adolph Hitler would ultimately fail.”
You see, our country and the world has been through so much and, let’s not kid ourselves, more is going to happen. Yet, the United States is still the best country in the world. Our people and economy are very resilient and we will continue to survive and ultimately thrive. But, without a doubt, there will always be a few curves in the road.
JAMIE DIMON AND PREPARATION
In the fall of 2009, I had the opportunity to attend and moderate a panel at the New York Bankers Association’s Annual Convention. One of the keynote speakers was Jamie Dimon, the CEO of JP Morgan Chase. He was captivating, forward thinking, and an amazing speaker. He is also an incredible executive, manager, and leader.
He was asked about the depth and length of the current economic crisis, and about his opinion and perspective for the future of our economy, and particularly for the banking industry. He said that in early 2009, his daughter, who was a college student at the time, asked him “How are we ever going to survive this crisis and aren’t you worried about the economic situation and its impact?” He responded to his daughter by saying he was already focusing on mitigating the next crisis. How interesting is that?
Mr. Dimon, who happens to be the same age as me, went on to say that in his lifetime he had witnessed the following events:
- The oil embargo and gas lines of the 70’s
- Interest rates hitting 21% in the early 80’s
- The savings & loan crisis in the late 80’s
- The commercial real estate crisis in the early 90’s
- The dot.com crash around the year 2000
- The 9/11 terrorist attack
- The current sub-prime/real estate mess
He went on to say, “Do we really believe that nothing else is coming down the pike or going to happen?” He wouldn’t specifically predict what might be next, other than to speculate that it could have something to do with international commerce, unfortunately terrorism, and/or perhaps be IT related, (i.e. data security and other potential security breaches and frauds). But he was certain that he and JP Morgan Chase needed to plan and be prepared for whatever might occur.
Mr. Dimon also discussed how he manages and delegates in a trillion dollar company. He never takes his finger off the pulse of what is occurring in each line of business, but he also doesn’t micromanage, making sure he finds the best, most competent people he can trust. He meets with his senior team minimally by telephone on a weekly basis and has an all day face to face meeting on a monthly basis…almost like a mini strategic planning session. Ultimately, what I learned from his comments was that the secret to good management is being ready to manage through both good and bad times, and most of all being prepared and informed. He concluded that each of these events should become a learning experience for the next occurrence for the successful manager.
The comments of both Doris Kearns Goodwin and Jamie Dimon, along with the current state of affairs are why enterprise risk management has become such a critical and strategic focus in the banking industry. We need to recognize that risk management is much more than credit risk, although credit risk may be one of the highest priority risk factors. Additionally, managing risk is also about managing capital. The OCC and financial industry regulators have nine categories of risk that are part of every examination today. The following is a breakdown of these categories:
I would also highlight that while bottom-line performance and profit are still the ultimate goal for all banks, safety and soundness and preservation of capital will continue to be the watch words for the next 12 to 24 months.
Consider the following trends as you plan for the long term:
- There is likely to be a surge in banking industry mergers and acquisitions.
- The rate of bank failures and government takeovers will remain far above the historical norm which is part of the reason for the surge in mergers and acquisitions.
- There will continue to be a growing acceptance of technology and online banking relationships and resulting branch network attrition.
- Regulators will continue to demand additional capital and reserves.
- The cost of regulation and compliance will continue to rise.