Keys To Success

The Bank CEO Network recently sponsored a seminar on loan pricing. CEOs and Chief Lending Officers from five high performing banks provided insights to other Bank CEO Network members and lenders.

Specific strategics and tactics varied from bank to bank. However, there are four common characteristics that are appear to be keys to success. Those characteristics are:

• An in-depth understanding of risk
• A clear knowledge of who or what the organization is and where it is going
• People who "fit"
• Persistence

A formal risk assessment isn't always necessary to understand risk. However, the leader needs to know the answers to a lot of "what happens if?" questions. What is the absolute worse case result? Could we afford the risk the possibility of a worse case result? How likely is a worse case result? How does that compare with the upside potential? Will a change bring more risk or less risk?

Everyone in the organization needs to understand the organization and its goals. This is especially true for top management, but every employee needs to be a part of the success of the organization. For example, a bank that is structured to work with commercial customers would not spend time and money creating retail products and services. The organization needs to be focused.

Saying an organization needs people who "fit" could be interpreted in a number of ways. In this situation "fit" means people who accept the culture and direction/goals of the organization and work to make a meaningful contribution to its success. Square pegs don't fit in round holes and sales people generally don't function well as bookkeepers - but you need both. Create an organization of people who are each doing what they do best in ways that will improve the possibility of success for all.

Persistence isn't always good. Refusing to admit a mistake and persistently moving down the wrong path borders on stupidity. However, persistence is often needed to keep an organization on track. Without unfaltering persistence, most organizations will veer off course and never reach their desired objectives.

Obviously, other factors such as effective operating controls, financial resources, etc. can not be ignored. Even with seemingly unlimited financial resources and effective operating controls, it would be rare for an organization to excel over time without these four factors.

What's your perspective? Are there other equally or more important factors that drive success?

Economics

Are we in a recession? Will the Federal Reserve raise interest rates? Is inflation too high? These are some of the questions being debated by economists. Well, I'm no economist, but it is obvious our economic situation is extremely complex.

When prices of oil and some grains soared to record highs virtually everyone was adversely affected. At least in the short-term, the responses to price increases are limited to one of the following choices: (a) change spending patterns and cut spending for non-essential items; (b) borrow; or (c) reduce savings either by saving less or by pulling funds from savings. For many households, the only reasonable answer was to change spend less. As a result, gas consumption has dropped, people are eating out less than before and some retailers are struggling to maintain sales volume.

Then we have the "mortgage crisis." Apparently a lot of mortgage loans were made either on the basis of faulty assumptions and/or the basics of lending were ignored. Either way, it appears there are billions of dollars in mortgage loans that can't be repaid. I suspect greed, stupidity and lack of discipline all played roles in creating the circumstances that led to this situation. The result has been a glut of houses on the market, tightened credit standards, a drop in house prices and construction costs, and Congressional hand-wringing and finger pointing. The losers are, of course, the lenders. (If you borrow 100 percent and lose the asset, you still have as much as you started with.)

So we have inflation in the price of basic goods (i.e., gas & food). The Federal Reserve's typical response to inflation is to raise interest rates as a way to slow the economy. However, the increase in the price of oil and the housing situation has already had a slowing effect on the economy. Would an increase in interest rates lower the price of oil and other commodities? Would an increase in interest rates slow the economy too much?

Another way to slow the economy is to reduce the amount of credit available. Bank regulatory agencies are doing their best to make that happen. Accounting standards and regulatory guidelines have been re-interpreted in ways that result in higher loss reserves and lower capital. As a result, many banks have responded by severely limiting lending activities. The result? Small businesses, in particular, will find it difficult to obtain financing needed to grow and marginal businesses will fail.

A final footnote to my economic observations: The large financial institutions who created, purchased, packaged and sold the mortgages that are credited with creating the crisis seem to be emerging battered, but relatively secure. Executives who presided over these are being terminated - with comparatively huge severance packages. (Hire me for a few months and give me one of those severance packages!) The concept of "market discipline" won't work without consequences. Without changes, we'll have another one of these crisis situations somewhere down the road.