Pillars Of What To Avoid In Banks (Issue #57)
Banking is multifaceted. These facets are both positive and negative. I have spent a lot of time talking about what to look for as positives, but now I want to highlight red flags in banking. Here are some key characteristics to avoid in banks:
Over Complication
Banking is complicated enough as it is additional over-complication by managers is unnecessary and problematic. As Brent Beardall, CEO of Washington Federal, says, “You don’t even know your cost of goods sold until a loan is done.” The job of a bank manager is to distill the process and make it as simple and pure as possible.
Lack Of Tenacity Towards Optimization
Not only is banking an exact science, but it is also an exact art. Understanding what makes a good loan is more than numbers. It is also understanding the qualitative sides of economics. For example, second-floor retail doesn’t work and the number of cars in a parking lot doesn’t correlate directly to revenue. This makes banking both an art and a science. On that same token, no loan should be made without sufficient quantitative due diligence either. This can lead to a number of issues.
Excessive Risk Taking
There’s a saying that goes, “Getting rich is taking large risks with small amounts of money, staying rich is taking small amounts of risk with large amounts of money.” Banks inherently hold and manage significant sums of money. Banks and bankers aren’t supposed to bet the farm to make investors large returns. They are supposed to be pilings of society that withstand tides and hurricanes. They are platforms for commerce to be built on. Excessive risk is not the path to this goal.
Lack Of Innovation
The average lifespan of a bank is 103 years. This isn’t achieved by falling behind the times. Innovation is key to the relevance and effectiveness of banking. While excessive risk is not valuable for banks taking small risks and experimentation is very valuable. These activities lead to the creation and iteration of online and mobile banking, ATMs, and more. These are the keys to sustaining the stability banking can provide and maximizing the agility of even large banks to quash financial qualms before they become bigger problems (think JP Morgan and other banks’ responses to SVB and Silvergate).
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Until Thursday,
Soren