Having entered the industry in the late 1970s, I have had the good fortune of making it through four major credit corrections in banking, all of which were very similar in one very important way--they were unexpected.
As for my journey, I started as a bank teller while in college, worked as a bank regulator at the beginning of one cycle, came back "home" and worked my way up the bank credit ranks through another cycle, took a detour to the "wild side" and built one of the largest (at the time) U.S. commercial real estate (CRE) loan origination operations, and, as fate would have it, spent my last several years working out my--and others'--bad loans during the last major downturn before deciding there must be a better way.
Since leaving banking in 1992, I have worked with many of the world's largest banks and servicing organizations, trying to help them get control of the data and processes they need to better manage their risks and grow their businesses.
Due, by and large, to the inability of the technology industry and internal information technology (IT) departments to demonstrate value to chief executive officers (CEOs), as well as a very benign credit environment and fairly good economy up until last year, other priorities took precedent. As a result, very few banks have been able to address the change required to build the integrated processes and systems to support the agility the current competitive environment demands, while at the same time meeting their organization's governance, risk-management and regulatory requirements.
The goal of this article--and my doctoral work at the University of Maryland, College Park, Maryland--is to highlight some of the successful ways in which banks are dealing with the aforementioned issues. However, the main focus of this article is to report on what I saw in the 14 bank studies I was able to review, and not to make specific recommendations. The banks studied were the top 30 based on asset size, and each of the studies was conducted as a part of the banks' 2007 or 2008 strategic planning processes. As for my research, I was looking for common themes among the banks, as well as how they could leverage their various initiatives to also help support the data quality, risk management and capital adequacy necessary to sustain profitability and build resiliency.
A window on what banks are doing
Over the last couple of years, a number of banks I have worked with have undertaken extensive internal studies of their commercial lending businesses and operations. As part of my doctoral research, I have talked to many of the top banks' senior credit officers, as well as reviewed internal re-engineering studies and capital-improvement initiatives that were a part of the strategic planning process of 14 of these top-30 largest banks (in terms of total assets). There were a few common themes that motivated the studies: regulatory compliance and risk management; the drive to free up and more effectively manage regulatory capital; competitive positioning; reducing the cost of the lending process; and responding to stock price, growth, mergers or executive management changes.
Like any competitive industry, banking is continuously looking for ways to improve. The degree of improvement or motivation is the result of many factors, including organizational priorities, resources, capabilities, prior experiences and culture. In addition, the market conditions at the time of these internal re-engineering studies--such as competitive concerns and issues around Basel II and capital adequacy--create other driving factors that in turn can change and impact the original motivations and subsequent recommendations.
So based on my research, I would like to share what I learned about what is going on in the industry and some of the benefits that have been achieved from the various approaches.
While the key commercial banking functions of transferring risk, providing liquidity, facilitating financial transactions and providing information have not changed much in hundreds of years, the last few years have seen a major change in competitive structure and product complexity. …