The Bankers' Recession Survival Guide

Why Cost-Cutting Could Kill Your Bank (And What to Do Instead)

As we navigate through increasingly volatile economic conditions with an official recession very likely on the horizon, bank and credit union leaders are dusting off their downturn playbooks. 

The traditional approach is all too familiar: slash expenses, close branches, reduce headcount, exit marginally profitable business lines, and bolster loan loss reserves. 

But is following this conventional wisdom still the right path? 

Does it position your institution for success once the economic cycle inevitably turns? 

More importantly, the VUCA (volatility, uncertainty, complexity, and ambiguity) cycle is coming around faster and faster. Are you going to hunker down forever hoping for a return to “normal” that never comes? 

The Old Playbook: Cost-Cutting as Strategy 

When faced with economic uncertainty, the reflexive response of many executives is to reach for the red pen. After all, the math is straightforward: reduce costs quickly to protect the bottom line. It's tangible, measurable, and creates the appearance of decisive action. 

There's no question that prudent expense management is essential. But there's a critical distinction between strategic cost optimization and indiscriminate cost-cutting that jeopardizes future growth. 

Two Paths to Efficiency: Choose Wisely 

I've experienced firsthand that there are two distinct approaches to improving a financial institution's efficiency ratio: 

Path 1: Cut costs below the current run rate of revenue. 

This approach creates a doom loop that's hard to escape. When revenue growth stalls, cost-cutting becomes the primary lever for maintaining profitability. Each round of cuts makes it increasingly difficult to invest in capabilities needed for future growth, leading to further revenue stagnation and renewed pressure to cut costs even further. 

Maybe the most dangerous aspect of this cycle is when institutions fail to distinguish between true discretionary expenses and investments essential for future competitiveness. A bank that cuts its digital innovation budget to preserve quarterly earnings may save today at the expense of tomorrow's relevance. 

Path 2: Grow revenue faster than the current run rate of expenses. 

This alternative path also creates positive operating leverage but establishes a virtuous cycle instead. By focusing on sustainable revenue growth while maintaining disciplined expense management, institutions create a positive flywheel effect that builds momentum over time. 

Not only is this approach more sustainable, it's considerably more energizing for your team, your customers, and your shareholders. 

Recessions as Opportunities for the Strategic Few 

History proves that economic downturns, while challenging, have birthed some of today's most successful enterprises. 

• Square emerged from the 2008-2009 recession by identifying a gap in the market for simple, accessible payment processing for small businesses when traditional financial services were retreating 

• Credit Karma (also founded during the 2008 recession) - Provided free credit monitoring when consumers needed financial clarity most and traditional providers were charging premium fees 

• Venmo (founded 2009) - Revolutionized peer-to-peer payments when traditional banks were focused on recovery rather than innovation 

• Stripe (founded 2010) - Simplified online payment processing when established financial institutions were hesitant to serve emerging digital markets 

These companies didn't succeed by slashing investments during downturns, they survived by identifying unmet needs and thrived by continuing to invest strategically while others pulled back.

The Strategic Imperative for FIs Today 

Yes, I know, these startups didn’t have to worry about managing a deteriorating loan book. For many bank and credit union leaders facing today's uncertain environment, that may very well be job one. 

But that only prevents success, it does not ensure success. 

Here's a simple framework for determining what's truly required versus optional: 

1. Required: Investments that enhance competitive differentiation In an industry awash in commoditized products and services, anything that helps you stand apart from competitors isn't optional, it's essential. This might mean development of unique product bundles, specialized expertise in high-value market segments, or superior digital experiences that solve real customer pain points. 

2. Required: Product innovation and strategic partnerships As non-traditional competitors continue gaining market share, doubling down on innovation isn't a luxury, it's survival. Partnerships with fintechs that extend your capabilities and reach have never been more critical. 

3. Optional: Legacy systems and processes that don't serve your target customers Not every product, service, or delivery channel deserves preservation. The key is making cuts based on strategic alignment, not just cost. A branch network serving your core customer segments might be worth maintaining despite its cost, while one serving non-strategic segments might not. 

4. Optional: "We've always done it this way" Challenging times demand honest reassessment of longstanding assumptions and practices. If the only justification for a particular business activity is tradition, it deserves scrutiny. 

Turning the Corner with Vision 

The financial institutions that emerge strongest from economic downturns are rarely those that cut deepest. They're the ones that maintain a clear strategic vision, protect capabilities critical to future growth, and continue investing—albeit carefully—where others retreat. 

Cost-cutting might preserve your efficiency ratio for a quarter or two, but innovation and differentiation are what build sustainable value over decades. 

In the current volatile environment, prudence is warranted. But vision, courage, and strategic clarity will ultimately determine which financial institutions merely survive and which ones truly thrive in the next economic cycle. 

Rather than asking "What can we cut?", the more powerful question is "What must we preserve and strengthen in order to win?"