Three months and three failed banks later, the onslaught of analysis as to how a handful of the nation's top banks by assets could collapse and fail so quickly has been overwhelming. The number of intellectual post mortems shouldn't surprise; pundits and regulators thrive in reactionary environments where it's easy to assign blame and armchair quarterback what management and regulatory actions should have taken place.
That's not to say these insights aren't valuable. They provide some clarity to a public that is, once again, questioning the complexity and risk parameters of the U.S. banking system. Some offer deep dives into the microeconomic forces that took these banks over the brink, while others bang the drum of a weakened regulatory system that needs strengthening.
Unfortunately, these insights pass right by the most important common thread in these failures: leadership.
SVB's board, asset-liability committee and executive team had access to mountains of data predicting the challenges their balance sheet faced as well as the percentage of deposits above the Federal Deposit Insurance Corp.'s $250,000 limit (more than 93%). The FDIC blamed Signature's management team for their strategies and failure to move quickly enough on regulatory warnings. First Republic's uneven CEO succession brought to light a cult of leadership and decision-making often led by a single voice.
At every corner, within every seemingly complex web of decision-making, foundational cracks in leadership are laid bare.
In hindsight, it's easy to catalog where improvements in leadership were needed and what leadership should have done to prevent these failures. Yet what lessons will the banking industry learn from these failures — will we begin to witness preventative and predictive, and not just reactionary, action?
Current trends say no. We are truly concerned banks are missing a prime opportunity to assess and improve their boards and key leadership roles.
Understandably, regional banks have become extremely cautious since the collapse. As of May 31, the KBW Regional Banking Index has dropped over 28% year-to-date. Rising deposit rates drive higher net interest costs, tighter lending standards temper commercial loan flows and economic forecasts continue to fluctuate. All of this leads to uncertainty — an emotion that boards, executive teams and analysts fear.
Uncertainty breeds inaction. At a time when banks must assess leadership and upgrade talent, most find themselves frozen, numbed by cost-cutting activities and clutching the mistaken safety blanket of time, waiting for economic and emotional tides to turn. The ostrich strategy is in full force.
Banks must not stall their talent and leadership agendas. Recent studies have found that, when asked about the top issues impacting organizational health, "availability of key talent/skills" is the leading concern across boards and C-suites. Additionally concerning is that less than half of leaders report feeling prepared to address these talent challenges.
Banks can dedicate themselves to strengthened scenario planning, improved liquidity monitoring, increased capital discipline and operational rigor all they wish. But without the right boards and leadership teams, these initiatives often fail. Subpar boards and tentative executive teams cost banks dearly as they weaken internal and external confidence.
The state's law does not cap rates at the level preferred by consumer advocates, but it does limit the availability of payday loans that carry annual percentage rates between 36% and 50%.
Banks are predicting annual risk technology spend to increase 10% over the next few quarters. Increasing the sophistication of data analytics and AI to improve stress tests and real-time monitoring of risk is a multimillion-dollar investment. Yet our data shows that less than 30% of banking leaders feel they have the right technology executives to successfully implement these technologies and processes.
This talent gap leads to a nasty downward spiral. Investments in new technologies that fail to meet stated objectives complicate and slow platforms already struggling to meet increased customer expectations and heightened regulatory standards. This invites regulators to amplify the pressure to improve as customers flee.
Bank boards face similar challenges. According to a 2022 PwC survey of more than 700 public company directors in the U.S., nearly half of directors said at least one of their fellow directors needed to be replaced, with 20% of respondents looking to replace two. Less than half thought their peers had a strong grasp of cybersecurity.
What comes next? Regulatory agencies will begin to implement overzealous proposals, offering regulatory prescriptions to cure past illnesses. Most banks will struggle to hire qualified compliance, risk and technology executives, not to mention board members with the applicable experience to fill audit and risk committees. The war for talent will explode. Much like the beginning of 2010, executive talent will be sparse, expensive and drive the market.
So, what can banks do in response? Move now.
Jamie Dimon of JPMorgan Chase saw the need for first-mover advantage in 2009 and built the industry's top compliance and risk department during the financial crisis. Dimon did not hesitate, and the rest of the industry spent years competing with each other to pick off his best risk and compliance executives at compensation packages far beyond JPMC's initial build.
The end of 2023 and 2024 will see banks needing to upgrade their boards and executive talent to meet adjusted regulatory expectations as well as investors and activists demanding action. The rush to hire executives qualified to meet these initiatives will take place in a highly competitive environment. Demand will outstrip supply, and the cost of managing these new expectations will be extreme.
Today's depressed equity positions and lowered bonus expectations offer banks exceptional value when acquiring executive talent. A year from now, stock portfolios will have recovered, and bonus targets reset, which will skyrocket talent acquisition costs.
Bill Demchak, the chief executive officer of PNC (whose bank is headed toward a record year), summed up the situation quite well: "These state chartered banks … had management that wasn't up to the task. There were a handful of characters who frankly did the country a disservice."
Being aggressive and proactive in board and executive team assessment and recruitment during a crisis is not contrarian — it is the exact right move. World-class organizations recognize fraught moments as opportunities; their executive talent and board acquisition strategies directly correlate to their continued success. Banks would be wise to follow suit.
