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Changer Danger

Bankers tend to view themselves as rational assessors and effective managers of risk, and they often use that as an excuse to avoid doing new things. Or at least to do them as painstakingly slowly as possible, even when customers’ needs and options are obviously increasing rapidly. Yet, bank failures are on the rise, and the causes aren’t new, they are as old as the industry itself.

Be an Advocate, not an Apologist

We are unabashed advocates for small and mid-sized banks and the value they can and do bring to local communities. Our mission is to level the playing field for them and provide network effects that can accelerate innovation, build partnerships, and make strategic investments to help them provide products and services that make their customers’ lives better. Part of our role is to sometimes provide a little “tough love” to spur them to go beyond merely being a safe and sound bank. That’s the floor, not the ceiling.

The banking apologists out there are using the current environment to justify their own fear of change to cluck at those big fancy banks that ‘don’t understand’ what banking is all about. Apologists argue that the recently failed banks engaged in ‘risky business practices’ while failing to recognize that the most fatal of their misdeeds were in the things banks are supposed to be good at. Apologists throw these stones while diligently polishing the panes of their own glass houses.

John Maxfield has done exhaustive research into the long history of bank failures in the United States, and he says “for every bank that fails today, there are likely hundreds, if not thousands, of banks that failed in the past for the same reasons”. Here are the top ten reasons for bank failures:

· Commercial Real Estate

· War

· Sovereign Default

· Government

· Fraud

· Frozen Securities Markets

· Overconcentration

· Interest Rate Mismatch

· Foreign Exchange Trading

· Wrong Way Bet on Interest Rates

Kiah Haslett, managing editor for Bank Director quoted the Fed directly in a recent article on how Silicon Valley Bank’s “rapid failure can be linked directly to its governance, liquidity, and interest rate risk-management deficiencies,” and the FDIC on how Signature Bank had weaknesses in “liquidity contingency planning, liquidity stress testing, and internal controls” that figured “prominently” in its failure.’

Depositor runs on banks is the sepsis of ailing institutions, an extreme reaction that can become overwhelming and life-threatening. While modern technology has a role in speeding the demise of ailing institutions, it’s not the primary cause of death.

This difficult environment makes it tempting to do less because it feels safer. As Jason pointed out in his post Run, Don’t Walk, “The zero interest rate world blunted the importance of scale and efficiency because the inputs were free. Rising rates tilt the scales to largest, most automated players.”

For banks not in deep crisis, the priority must be to increase focus on customers and find new ways to bring them real value beyond “a relationship”. Having strong customer relationships is a good and desirable outcome from providing real value over time, not the goal in and of itself.

Your bank is more likely to be acquired than to fail. No one will cite "lack of innovation" or "lack of technology" as a reason for selling their bank. In fact, those are more likely to be cited as reasons a potential acquirer loses interest. But as banks fail to meet customers’ rising expectations, their stagnant growth will lead to more sales to more capable hands. There are a lot of reasons why banks sell out to acquirers, but in the final analysis, the sellers' board and shareholders vote that another management team could likely do a better job than the current team.

It's not a banker problem, it’s a human problem.

We humans are not the cold, rational risk calculators we perceive ourselves to be. The fear of change is called metathesiophobia, and neuroscience research shows that our brains perceive no difference between uncertainty and failure. The default mode deep in our lizard brain is to perceive change as threatening. Emotional factors also play a role in our perception of risk.

Fear and anxiety can cause us to overestimate the likelihood of negative outcomes, while overconfidence can cause us to underestimate the risks of certain actions, or inaction. Moreover, societal factors, such as media coverage and cultural norms, can influence our perceptions of risk. For example, the media tends to focus on dramatic and rare events, which can distort our sense of what is actually risky.

Heart disease and cancer are far and away the top two causes of death in the U.S., but attention and angst about those two very clear real risks are dwarfed by the perceived risks of things that just seem scarier.

A family in Connecticut made the news in 2019 when the mother and father were arrested and investigated for child negligence for allowing their children, ages 7 and 9, to walk to Dunkin’ Donuts by themselves. According to data from the National Center for Safe Routes to School, in 2019, about 10% of K-8 students in the United States walked or biked to school. This is a significant decrease compared to 50 years ago, when almost half of all students walked or biked to school. Children are somewhere between 5 and 10 times more likely to die by an accident than by “stranger danger”. The National Center for Missing and Exploited Children is now encouraging parents not to use that phrase because children are much more likely to be harmed by someone they know, and they could be in an emergency situation where they may need to ask a stranger for help.

The Devil you Know is Still the Devil

Humans are not naturally equipped with the necessary statistical and mathematical skills to accurately assess risk. This can lead to misunderstandings of probability, as well as difficulty in interpreting complex data.

“If you don’t like change, you’re going to like irrelevance even less.” – General Eric Shinseki

In the wake of the Silicon Valley Bank failure the Federal Reserve wrote. “The goal of risk management is not to eliminate risk but to understand risks and to control them within well-defined and appropriate risk tolerances and risk appetites.”

Leaders who want to survive and thrive today’s challenges must ignore the copium offered by apologists. They must also recognize the risk of not taking (calculated) risks.

None of your customers, employees, executive team, board, or shareholders will care that the reason your bank failed, or was acquired, or just plain under-performed is because you stuck to the basics of gathering deposits and making loans.

As General Eric Shinseki said: “If you don’t like change, you’re going to like irrelevance even less.”


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