Magazine article The RMA Journal

Of Herds, Lemmings, and Bandwagons

Magazine article The RMA Journal

Of Herds, Lemmings, and Bandwagons

Article excerpt

Nightly Business Review" celebrated its 25th anniversary on PBS in January. To commemorate the occasion, the top 25 U.S. business leaders over the past 25 years were contacted for their advice on succeeding in business. Andrew Grove of Intel, deemed best of the best, advised simply, "Don't follow the herd."

My, how often we bankers have heard that one. There have been papers written about it ("Rational Herding in Financial Economics," Devenow and Welch, European Economic Review; "Lemming Banking," SASE 2001 Abstracts, Fink and Haiss). We've accused one another of it (not to our faces, of course).

The bandwagon doesn't seem to get any less crowded, and today's front-running wagon is retail and consumer business. For some banks, this represents a significant, time-consuming, and expensive change in direction. Of course, it's easy to understand why it happens.

Shareholders' mantra continues to be "Show me the money." Certainly, we like to impress our shareholders and appear to be a step ahead of the game, so as soon as we get win of a new and potentially highly profitable business line, we want to be able to tell our shareholders we're in on the action.

Meanwhile, the balance sheets of many institutions have changed significantly over the past 20 eyars, with the result that consumer and retail now garners 50% of profits. Certainly, performance held up during the latest cycle, with retail driving earnings at most institutions. Hence, the growing desire to diversify earnings and grow the retail balance sheet.

But, are some banks arriving at the party too late? And have there ever been instances when the bandwagon has stalled or just broken down? Let me count the times. Will we ever change? Doubtful--it's human nature, and it's seen in every industry from TV to automobile manufacturing. …

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