Tuesday, May 13, 2014

Federal Reserve Challenges Parsons' Recommendations

Community Banks are Vanishing at an Alarming Rate

It's nice to know U.S. bank regulators are reading my Op-Ed articles in the American Banker. On May 1st the AB ran my Op-Ed entitled, "Two Policy Changes That Could Help Save Community Banks" urging Congress to take immediate action to save U.S. community banks from going the way of the corner drug store. As I write in my book, "Broke: America's Banking System", more than 3,000 community banks failed in the U.S. over the past three decades. U.S. regulators have responded with whack-a-mole supervision. Now every management decision is treated as critical; but is it? And what are the unintended consequences of hyper-supervision of the nation's smallest 90% of the banks that account for less than 10% of U.S. bank assets?

Major in the Majors

Here is what I expect: Half the banks under $1 billion in size will merge between now and the end of 2020. If Congress wants to save community banks, it must drive tangible changes that improve the environment in which banks operate. What is needed, ironically, is less supervision. But here is the key: Major in the Majors. Regulators should focus community bank supervision on the critical few factors that cause banks to fail: Asset Growth Rates and Asset Concentration. Apparently the Federal Reserve Bank of Minneapolis read my Op-Ed because on May 7th the American Banker posted a Fed response titled "The Surprising Truth About Community Bank Consolidation". Here's the upshot of the Fed response: Don't worry, the cost of added regulation is not really all that much, so everyone should just relax. Apparently at least six bankers don't agree. On May 5th and 6th the American Banker reported six more bank mergers.

Richard J. Parsons is the author of "Broke: America's Banking System". He is a frequent contributor to the American Banker and a member of the Editorial Advisory Board of the RMA (Risk Management Association) Journal. Rick can be reached through RJParsonsGroup.comFacebookTwitter and LinkedIn.

Friday, April 18, 2014

Lending Club Raises Big Bucks and Vaults to $3.8 Billion Market Cap.

A New Bubble or are Banks in Deep Trouble?

Don’t let all the bank earnings reports distract you from the really big news this week for U.S. banks.

As reported in the Wall Street Journal April 17th, Lending Club announced that it raised $115 million in new capital to fund its meteoric growth.   For those too busy to see over the horizon, Lending Club is a peer-to-peer lender determined, in the words of their founder, to “transform the entire banking industry.”

They and their competitors remind me of Capital One and MBNA back in 1990 when a new generation of niche credit card firms launched.  Back then bank competitors pooh-poohed these “specialty” players as too small to matter.  Over a 15-year period, these itty-bitty credit card niche players grabbed enormous market share and pushed complacent bankers out of the card business.

Could the same thing be happening before our very eyes with peer-to-peer lending.  Apparently some smart investors (Blackrock, T. Rowe Price, and Wellington Management) think so, having invested in Lending Club.  Based on the equity raise, according to the Financial Times and Wall Street Journal, Lending Club today is valued at roughly $3.8 billion.

How impressive is that number?  Consider this: Lending Club’s market cap is greater than First Niagara and Synovus Financial, both of which are among the 50 biggest bank holding companies in the U.S.

And for further perspective, over the past 12 months Lending Club booked $2 billion in loans.  That’s less than 1/10th the total asset size of one of America’s best-run banks, Kansas City-based Commerce Bank. Yet the 148 year-old Commerce Bank has a market cap today a mere 10% higher than Lending Club.

So here’s the question: Is Lending Club a 2014 version of a dot-com bubble?  Or is it a 10X Risk that threatens the future of bank lending?  Stay tuned.

Written by Richard J. Parsons

Broke: America's Banking System
Richard J. Parsons is the author of “Broke: America’s Banking System”. He is a frequent contributor to the American Banker and a member of the Editorial Advisory Board of the RMA (Risk Management Association) Journal. Rick can be reached through RJParsonsGroup.com, Facebook, Twitter and LinkedIn.

Wednesday, April 16, 2014

Are Banks Over-Reaching For Loan Growth?

Banks That Grow Too Fast Hurt The System

I’ve been keeping a close eye on JPMorgan Chase lately because they appear to be in bunker mode, meaning they are storing up tons of cash (more on that latter) and proving to be tight-fisted lenders, especially in Commercial and Industrial (C&I) lending. With a loan to deposit ratio of 56% and sharp words of caution about competitor lending practices, I am beginning to think JPM sees the End Times near.
If JPM is worried, should bankers and bank investors worry too?
In my book I coined the term, “10X Risk”, to describe bone-headed mistakes that kill banks or destroy massive shareholder value. My in-depth research of bank failures reveals that the most common 10X Risk occurs when over-confident management and directors reach for loan growth.
Banks that grow fast are either smarter than the average banker (they always think that), built a new mousetrap (maybe, but it takes about two weeks for competitors to replicate), or just down-right daredevils (most likely).
When the industry grows much faster than the growth rate of GDP (1.9% in 2013 and 2.9% over the past 30 years), history shows there is an eventual reversion to the mean.Sometimes, as we saw in the mid-1980s and more recently starting in 2008, the reversion can be violent, leading to hundreds of bank failures.
C&I is a bread-and-butter loan category for commercial banks. The CEOs of the vast majority of banks grew up doing C&I lending. Since C&I is so crucial to U.S. bank profits, I took special notice of this comment made on the April 11 Analyst Call by Marianne Lake, JPM's Chief Finance Officer:
"We are seeing the ongoing aggressive investing environment on both credit terms and pricing, we will do every rational and sensible deal we can do but we are not going to chase growth at the expense of discipline.”
For those readers unaccustomed to banker talk, “aggressive” is code-word for "dumb." Lake is saying that there are some bankers so desperate to improve earnings (and their stock prices…and their bonuses?) that they are making loans they shouldn't.
Is she right?
I just returned from a conference where I spoke about the future of U.S. banking with bank risk executives from four states. In my conversations with these bankers I heard three messages consistent with what I am hearing from bankers across the country:
  1. C&I loan growth is one of their bank’s top goals for 2014.
  2. C&I loan demand is sluggish.
  3. Pricing on C&I loans is getting cut to the bone and loan structures are becoming more liberal.
In the lemming-like world of U.S. banking, it’s safe to say that C&I lending is the “next hot thing” for bankers. The good news is that there are plenty of banks out there with long-tenured, seasoned bankers at the helm who have seen this movie before and they don’t plan to buy a ticket to see it again.
On the other hand, if Marianne Lake is right, apparently there are some bankers and directors unfamiliar with this horror show.
I am curious: Are banks starting to take short-cuts again? If so, which ones are you worried about?
In the meantime, I am digging into C&I loan growth data across the industry. Stay tuned.

Written by Richard J. Parsons
Broke: America's Banking System

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America." He can be reached through his website rjparsonsgroup.com or via social media including @RJParsonsGroup and LinkedIn.

Wednesday, April 09, 2014

Enterprise Risk Management Requires Capable Operational Risk Management

People, Processes, Systems and Tools Ultimately Determine a Bank's Safety and Soundness 

A robust enterprise-wide system for managing bank risk is built on a strong foundation.  The strong foundation is comprised of four parts: People, Processes, Systems, and Tools to analyze external risks to the bank.  

The slide above is a picture of how bank directors and management should think about how to construct a strong Enterprise Risk Management system. At the top are banking’s 7 risk disciplines.  Each requires skilled bank experts.  In the middle is Enterprise Risk Management which is “owned” by the bank’s chief risk officer and CEO.  At the bottom are the four components of Operational Risk Management (ORM) which is the principal responsibility of bank directors in their exercise of effective governance.

Only a few banks in the United States have chosen to populate their boards with directors who are deep subject matter experts in such bank risk disciplines as credit, liquidity, compliance, or interest rates. Though there is evidence more banks are adding banking experts to their boards, the reality is that most banks lack such experts.  The principal reason few banks, especially community banks, have gone in this direction is because there is a shortage of people in the U.S. qualified as experts in these seven disciplines.  Another reason banks have not appointed such directors is because of a fear that highly skilled experts in the seven risk disciplines may struggle with role clarity.  Specifically, bank CEOs worry that directors who are deep subject experts in banking may start managing the bank versus governing it.  

However, as many bank boards learned during the Financial Crisis, the absence of deep subject expertise on the board does not relieve bank directors of the responsibility to evaluate the effectiveness of management’s skills and the bank’s processes used to manage the bank’s risks.  As this slide depicts, effective enterprise risk management is built on bedrock of skilled people using capable processes and systems.  Directors of all banks must be able to determine if their bank has capable PEOPLE who use capable PROCESSES and SYSTEMS to ensure the bank is effectively analyzing and responding to EXTERNAL EVENTS that threaten the bank’s safety and soundness. 

Written by Richard J. Parsons
Broke: America's Banking System

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America." He can be reached through his website rjparsonsgroup.com or via social media including @RJParsonsGroup and LinkedIn.

Wednesday, March 05, 2014

Time to Rethink Mandatory Retirement for Bank Directors

Warren Buffet is Not Qualified to be a Bank Director

Here's a fact: Due to his age, Warren Buffett is not qualified to be a director of three banks – Bank of America, U.S. Bank, and Wells Fargo – in which he has substantial investments.

U.S. Bank retirement policy requires all directors to retire at the age of 72.  Wells Fargo and Bank of America have an interesting twist to their retirement policies.  Each has mandatory retirement, but allows the bank to retain existing directors if the board's nominating committee deems it “in the best interests of the company” to keep the retirement-age director.

Fifth Third Bank also has a mandatory retirement age for directors. William Isaac, the former Federal Deposit Insurance Corp. chairman, has been a Fifth Third director since 2010.  As he noted in his Feb. 18, 2014 op-ed for American Banker, he will step down from his post in April when he turns 70.

Proxy season is nearly upon us. Perhaps this is a good time of year to ask why some banks require older directors to step aside.  Since this practice is so common, it must be good corporate governance.

Or is it?

Warren Buffett apparently thinks older directors are just fine for Berkshire Hathaway, one of the most admired companies in the world. Of the company's 13 directors, six including Buffett, are in their eighties.

In conducting research for my book, Broke:America's Banking System: Common Sense Ideas to Fix Banking in America, I examined the performance of 382 U.S. banks with assets below $10 billion that have been publicly traded since 2002 and remained in business through early 2012. The vast majority did not serve their shareholders well through the financial crisis: the average bank's stock price fell 43% during those 10 years.

Of the 382, shareholders in only 30 saw stock price appreciation for each of the one-, five-, and ten-year periods ending Jan. 31, 2012.

Additionally, of those 30 banks, 20 had directors on their boards now deemed too old to serve on the Fifth Third board.

These 20 top-performing banks – based on shareholder performance – had a combined 59 directors 70 years of age and older. Almost half were at least 75 years old. (The source for all board data is Morningstar, 2012.)

Eight of these 20 banks were chaired in 2012 by a person at least 70 years old. Three of those bank chairmen, like Warren Buffett, were octogenarians.

Texas is especially friendly to older directors. Four Texas banks were among the thirty top performing banks for shareholders from 2002 to 2012. Combined, they had 17 directors 70 years of age and older.  Seven of the 17 first became directors between 1982 and 1993, a time when more than 800 Texas banks and S&Ls failed. Directors and CEOs who survived such upheaval have long memories.

Only one publicly held U.S. bank's shareholders enjoyed stock price appreciation greater than 200% for the ten-year period ending Jan. 31, 2012. That bank, Arkansas' Bank of the Ozarks, was up roughly 800%. Oh, by the way, five of its directors were at least 71 years old in 2012. All but one remains on the board today.

Is it possible bank directors over 70 years of age are actually associated with safer, better performing banks?

If true, the explanation may be found in a book written in 2012 by a former Deutsche Bank derivatives trader. In The Hour Between Dog and Wolf: How Risk-Taking Transforms Us Body and Mind, author John Coates builds a case that bank trading floors are dominated by pedal-to-the-metal young men overloaded with caveman testosterone. The young male trader is the backbone of a Wall Street business long associated with flashes of brilliance and bouts of devastating losses.

Coates is unusually prepared to tackle the study of hormones and banking. In addition to his experience on a derivatives desk, Coates has a Ph.D. in economics and an M.D. in neuroscience. He suggests banks can throttle back trading risk by employing more middle-aged men and women who have fractions of the testosterone seen among younger traders.
You have to wonder what Coates might think of 75-year-old bank directors.

If banks that performed well for their shareholders from 2002 to 2012 have so many older directors, why would some banks force directors to retire once they hit 70 or 72 years of age?

Perhaps banks with mandatory retirement ages have evidence that old directors are ineffective. If so, in the interest of the safety and soundness of the banking industry, they should share their data so banks without mandatory retirement can evaluate whether they, too, should adopt the practice and avoid running into future problems.

As well intended as mandatory retirement may be, it can run counter to shareholders' interest. Great bank directors are rare. They are also invaluable to a bank's long-term success.
By any criteria, Isaac is well qualified to be a bank director. Surely Fifth Third believes so, having paid him over $1.2 million in his first three years on the board.

His bank's shareholders have been rewarded with performance better than peer banks.

Clearly, many well-managed banks enforce mandatory retirement of directors. But if skilled directors are lost as a result, does it really make sense? Cannot board-nominating committees find another way to address underperforming directors, irrespective of age?  And if a board wants a retirement policy, why not just do what Bank of America and Wells Fargo do and keep the option of delaying retirement ‘in the best interests of the company'?

Written by Richard J. Parsons
This post was originally published by the American Banker website on March 5, 2014.
Broke: America's Banking System

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America." He can be reached through his website rjparsonsgroup.com or via social media including @RJParsonsGroup and LinkedIn.

Friday, February 21, 2014

The Perils of Fixed-Rate Lending

The road to hell is paved with good intention.

As I travel across the country talking to bankers, I am hearing two messages. First, loan demand, though better than a year ago, remains sluggish. Second, some banks are beginning to cut corners on loan terms in an attempt to book earning assets, improve net interest margins and pump up profits.

Here's the good news. Anecdotal evidence does not suggest the loan push is driving a wholesale reduction in prudent credit underwriting. Though there may be a few banks beginning to compromise lending standards, the bigger risk to banks may be the rising tide of fixed-rate lending that is beginning to creep across the nation.

While on the road two weeks ago, I heard from a banker who complained that he lost a good borrower to a commercial bank competitor offering a 4% fixed-rate, 20-year farmland loan. Here's the kicker: No balloon.

A few days later I talked to another commercial banker with over 30 years of experience in the industry. He told me that for the first time in his career, his bank has an endless appetite for long-term, fixed-rate loans for good borrowers.

Banking problems in this country don't happen overnight. Every crisis has its roots in risky behaviors that started off in small pockets around the country. Over time, in an effort to protect market share, other banks start picking up on these risky behaviors. Over the course of several years, the risk builds up until it is obvious to everyone that there is a problem. Too often the end result is financial losses and region wide bank failures.

Some big-picture background data may be helpful to illuminate the motivation banks may have to book long-term fixed-rate loans. Net loans and leases in the nation's commercial and savings banks are up 3.4% year over year (as of September 30, 2013), but down 2.2% from five years ago. On the bright side, annual growth over 3% is actually not bad given GDP growth for the past year is closer to 2%.

Taking a wider lens to understanding the pressure banks feel to grow loans, it's necessary to examine two key industry metrics: the loan-to-deposit ratio and return on equity.

As of the third quarter of 2013, the industry had a 69.5% loan-to-deposit ratio. How does that number compare to history? For the past two years, the ratio is 70.5%. Go back to the 80s and the ratio was 78.0%. It reached 82.9% in the 90s, and then from 2000 to 2009, it went all the way up to 90.5%.

Against this backdrop, commercial bank profitability is a concern. Through September 2013, the Federal Deposit Insurance Corp. reports the industry's return on equity is 9.44%, a number only slightly better than the industry's 30-year average of 9.12%.

Neither number is much to brag about when the top 15 utility companies in the U.S. have a 10-year average ROE of more than 12% and Canadian big banks average 17%. There should be no surprise that this superior performance enables the utilities and big Canadian banks to reward their shareholders with dividend payouts (4%) and long-term stock price appreciation substantially better than U.S. banks.

However, as ho-hum as the current and 30-year average ROE is for commercial banks in the U.S., the true story is arguably a lot worse than what is reported. You see, when the FDIC reports bank profits, it weights returns based on asset size of the reporting banks.

If the FDIC reported industry return on equity in 2013 based on the average bank, then the ROE drops to 7.84%. This steep decline reveals the unmistakable challenge thousands of community banks face in creating shareholder returns close to the bigger banks. Double-digit industrywide ROEs that banks of all sizes saw from the mid-'90s to 2006 proved to be short-lived. Don't expect to see such industry returns anytime soon.

Some bankers may be beginning to feel a bit desperate to improve profits which may explain the motivation to book long-term, fixed-rate loans without balloons. But such loans do not come without risk.

First, to state the obvious, locking in long-term assets – be it bonds or loans – opens banks to the same risks the savings and loans faced in the 1970s when inflation and interest rates escalated to a point where assets and liabilities were woefully mismatched. Banks that bet on long-term fixed-rate assets are betting that the 30-year downward trend in interest rates does not reverse. We'll see. It's been a good bet for the past 30 years, but cautious bankers and boards recognize that rates will rise eventually.

Second, for investors in bank stocks, they need to be wary of banks where loan growth rates impressively eclipse GDP growth. At a minimum, investors in faster growing banks need to press management to be transparent about the duration of loans and bonds. Fatter margins and better-than-industry loan growth may be the result of the bank's lean to higher-yielding, longer-term bonds and loans.

The highway to higher bank profits is littered with dead banks and S&Ls. Don't be surprised to discover a few more casualties along the highway if and when long-term fixed-rate lending really takes off.

Written by Richard J. Parsons
This post was originally published by the American Banker website on February 21, 2014.
Broke: America's Banking System

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America." He can be reached through his website rjparsonsgroup.com or via social media including @RJParsonsGroup and LinkedIn.

Thursday, January 02, 2014

The Next Banking Crisis: TALENT RISK?

A talent shortage is already bedeviling banks and unless financial institutions take action, it will only get worse when experienced baby boomers retire in droves.

In 1997, the McKinsey & Company consulting firm proclaimed that “the war for talent” would separate winners from losers in the years ahead. Sixteen years later, the banking industry is on the cusp of losing the war.

To understand the issue, consider a talent management planning session conducted by a community bank a few years before the financial crisis hit. Like many community bankers, the CEO of this bank started his career in the credit department of a bigger bank in the 1970s. Confident in his own background, over the years he had hired commercial bankers with similar training and experience.

As the CEO evaluated his bank’s talent, he discovered good and bad news. The good: He had a solid team. The bad: No one was under the age of 40. Concerned, he instructed his HR manager to build the bench of commercial bankers. To his surprise, HR came back and said it could not find one well-trained, experienced commercial banker under 40 in the marketplace.

Why were there no young and well-trained commercial bankers in his market? The CEO discovered that the bigger banks in the region had stopped running traditional credit departments back in the 1990s.

Reasons for the Current Situation

At least five factors drove the change. First and foremost, much of the industry was in bad shape at the time, which drove consolidation. Some 3,000 financial institutions failed from the early 1980s to 1993. Industry profitability was anemic. Banks responded as expected; weak ones merged into stronger ones, and hiring and training slowed. As the industry started to heal around 1993, mergers accelerated. As merger mania struck full force in the mid-to-late 1990s, many banks found themselves with excess talent.

Second, credit departments began to morph into centralized risk management functions, overseen (so we were told) by risk experts. The evolution of credit scoring models and more technical credit products led to a concentration of top credit experts in risk management departments. Bankers in the field evolved into “relationship managers” who didn’t need an understanding of how to analyze loan applications. In truth, they were sales representatives who relied on product specialists and credit underwriters to support them when customers and clients wanted a loan.

Third, in the late 1990s—despite a rebound in bank hiring from college campuses—new recruits explored different career paths. Trainees no longer moved into general management with an emphasis on credit training. Instead, they took on specialist careers in bank disciplines including human resources, supply-chain management, finance, and so on.

Call outFourth, some banks that retained general training programs discovered that the programs were not cost effective. The key to the economics of training is the income realized when graduates serve clients and build revenue and profits. Smart competi¬tors without programs realized that they could recruit newly minted trainees and benefit from their training without paying for it. Banks that lost talent grew tired of aiding competitors.

And fifth, and arguably most important, starting in the late 1990s bigger banks shifted profit and loss (P&L) responsibility from local markets to centralized functions. Driven by the presumed efficiencies, they centralized such decisions as de¬posit and loan pricing, marketing, branch planning, and credit underwriting. As a result, fewer and fewer bankers gained broad P&L management experience early in their careers, as the P&Ls got pushed higher and higher in organizations. It is not easy today to find a banker hired after 1995 who has managed a true end-to-end bank P&L.

After these seismic changes, the financial crisis struck in 2008, triggering nearly 500 bank failures and turning nearly 1,000 institutions into “problem banks.”

What do bank failures and problem banks have to do with the talent war?


When banks fail and cause a material loss to the FDIC, federal bank regulators must conduct a material loss review (MLR). More than 100 MLRs have been written to date. Nearly all cite weak management as the leading cause of failure. The talent issue extends to problem banks, too. Their directors get enforcement action letters from their regulator. The most common theme of the letters is the need to upgrade management.

Five Actions for Banks to Take 

Between now and 2020, many baby-boomer bankers, born between 1945 and 1965 and trained in the 1970s and 1980s, will retire. In my national database of 399 community banks with fewer than $10 billion in assets, the average age of those banks’ CEOs is nearly 59. Fifty of them—about 13%—are younger than 50. Another 40% are 60 and older.

Are the directors of banks confident they have adequate succession plans? Do they know the depth of their talent bench? Who will run the nation’s community banks in 2020? In 2030? What should directors of financial institutions do about the talent issue?

Every bank should consider taking these five actions in 2013:

First, identify, measure, monitor, and report on the state of talent. Though the talent assessment process doesn’t need to be overly elaborate, it must be formal, disciplined, and documented. A good process must include timely and ac¬curate performance assessments for all employees, including senior management. These performance assessments must be honest, fair, accurate, and actionable.

Do independent board members have a strong handle on the bank’s talent gaps? Can they show the bank has concrete steps in place to close the gaps? Too often directors find out about their bankers’ skill gaps only after there is a problem. Unfortunately, in the buildup to the financial crisis, too many bank examiners missed the weak-management issue in their CAMELS ratings. Directors must be able to judge whether their banks have the appropriate processes in place to evaluate talent independent of regulators’ judgment.

But talent planning must be about more than performance problems. It should also be about retaining and developing your best talent. Directors should ask whether the bank has talent-development plans to advance the skills of its most promising employees. These discussions should focus on multiple generations of bankers. A well-managed bank should have a coherent plan for building the skills of those who will run the institution now as well as in 2020 and even 2030.

Second, on a related note, make sure you have succession plans in place for all key leadership roles. It is more important today than a year or two ago to take succession planning seriously. Why? As bank balance sheets heal and stock prices rebound, you can expect an upward trend in retirement announcements, just as happened in the period from 1993 to 1998. A banking crisis takes a toll on people. Even the best EverReady bankers can only run so hard for so long.

But retirement is not a board’s only succession plan issue. As the industry moves forward and profits return, expect the war for talent to translate into a greater demand for a diminishing population of real bankers. You can be sure the best executive search firms are calling on your bankers, tell¬ing them about jobs down the street and across the nation.

It’s not just CEOs who get these calls. Recently, in the Southeast, a five-person loan platform of commercial bank¬ers moved en masse from one community bank to another. Is your bank prepared to lose all its commercial lenders? If you succeed in keeping them, are you prepared to increase their pay in a world of growing demand and shrinking supply?

Third, bank executives and directors need to invest time and money in developing employee skills. Banks built to last must commit to continuing education and, where possible, certification of their employees’ knowledge. Cutting back on employee development is tempting when net interest margins are tight, loan demand is sluggish, and fee income is trending the wrong way. However, the short-term gain often proves penny wise and pound foolish over multiple economic cycles.

Fourth, the best bank directors not only examine their bank’s talent, but also look candidly in the mirror and assess overall board skill and experience. In December 2012, Ameri¬can Banker reported on an OCC study of board oversight at the nation’s 19 largest banks. The study revealed that only two of these bank boards were demonstrating strong bank oversight, while 14 were at least a year away. What are the chances that thousands of other banks in the country might share the same board oversight issues as the largest banks?

Directors at all banks would be well served to conduct a candid and thorough self-assessment. Gaps must be identi¬fied and documented. My own analysis of 435 banks smaller than $50 billion in size shows that more than 50% of the independent directors of these banks lack professional backgrounds in banking, accounting, law, investments, or bank regulation. Some banks do not have one independent director with experience in any of these five fields.

Fifth and finally, here is another action directors should take. Let’s return to a decade ago and the bank and CEO introduced at the beginning of this article. When the bank’s CEO and board realized they had a talent issue, they decided to entertain offers to sell. The bank was indeed sold a few years before the crisis to a regional institution. Being ahead of the curve, this bank was paid a rich premium to book value.

Today, after confronting possible talent gaps, succession planning issues, and concerns about bench talent, bank directors need to determine if selling the bank is the best way to mitigate talent risk. Expect to see more bank mergers in 2014-18 because of the need acquirers and sellers have to mitigate talent concerns. Acquiring banks would be wise to carefully assess the depth of talent in potential acquisitions and know if the talent they are acquiring is likely to stay on after the merger. Sellers of talent-laden banks should be able to earn a richer valuation.


There are hopeful signs that the banking community is be¬ginning to recognize the talent issue. CEOs of a few community banks have resurrected college recruiting programs and instituted general management training. A growing number of banks have made progress in closing director skill gaps by providing training and bringing in directors with the experience to govern banks. In addition, the boards of a small number of leading banks have formed human resource (or human capital) committees.

The war for talent in banking is here. As in any war, there will be winners and losers. Winners will be the banks whose leaders recognize that concrete steps are needed now to attract, develop, and retain talent.

Here are the questions that directors, CEOs, chief HR officers, and chief risk officers need to ask and answer today: 
     1. Should the bank have a board committee focused on human resources?
     2. Does the bank have an effective performance management system in place? 
     3. Have talent gaps been identified and is there a clear-cut plan to close the gaps? 
     4. Does the bank have a succession plan for key management positions? 
     5. Is there a pipeline of next-generation talent being developed? Looking ahead to 2020 and even 2030, is the bank developing the general management skills of future CEOs and other executive officers? 
     6. Just as the bank employs external auditors to attest to the integrity of financial systems and reporting, has it conducted an external audit of its critical talent management systems and processes?

Like financial markets, the market for talent is dynamic and ever-changing. Great banks will act immediately to make sure they have the rigorous systems and disciplined processes in place to win the talent war.

Written by Richard J. Parsons
This post originally appeared in the December 2013/January 2014 edition of  TheRMA Journal

Richard J. Parsons is an Author, Speaker, Educator and Business Advisor in the Financial Services industry.  After a 31 year career at Bank of America, Rick founded the RJ Parsons Group in 2012. Rick published his first book in 2013, "Broke: America's Banking System - Common Sense Ideas to Fix Banking in America". He can be reached through his website rjparsonsgroup.com or via social media including @RJParsonsGroup and LinkedIn.