No one can predict the future. This is a truism like death and taxes. In the world of economics, economists are the frequent target of humor as many of their predictions fall short or wide of their mark. There is no shortage of studies showing experts in the predication business performing at par. Many say that throwing darts at a board is more accurate when it comes to future expectations. Still, preparing for the future has everything to do with what we do today, as Risk Managers. Doing the right things, enables us to be in the best possible position regardless of what future events unfold.
The NJ Bankers “Banking on the Future” conference was a centered event. The topics and content discussed, focused on what we can do today to bank on the future. Where we are today and what steps we can take today to ensure prosperity in our future. The following is a summation of topics and themes presented in Atlantic City in mid-September by representative member banks. My main take away from the event was that we must keep our eye on the good, while always preparing for the bad. If we do this, we will maximize the good and minimize the bad. Read below to learn more.
Community Banks can take a bow and applause for an outstanding response to a pandemic that has impacted thousands of businesses and millions of lives. The banking industry has successfully navigated the consumer and business markets through a shutdown and re-opening of the economy. Community Banks were true to their mission of serving their communities and customers in the best ways possible. However, banks must now wrestle with the forgiveness process of government backed PPP loans and the waning of extraordinary money printing. This has propped up balance sheets and staved off bad debts, for now. Eighty percent of all PPP loans issued were issued by Community Banks. Regulatory agencies that were accommodating will begin to tighten their lenses.
The regulatory headwinds that banks face today are daunting. An aggressive regulatory administration has prompted industry associations and representatives at the state and federal levels to work tirelessly to modify new rule proposals. It is argued that these proposals would put banks, especially smaller banks in an untenable compliance situation. These include new climate risk assessments with no tangible benefit while significantly raising compliance costs. A new IRS proposal for unprecedented amounts of data for all transactions of $600 and higher. Consumer privacy and overreach are being argued in addition to a high operational burden. The industry is also taking aim at what it says is an unfair tax exemption status of credit unions, providing them with an unfair advantage in acquiring banks. How these matters will be resolved, only time will tell.
Present events are a tell as to what the future holds. It has been widely reported that the business and societal conditions created by the response to the pandemic, resulted in a fast and furious digital technology leap forward in banking. FinTech four years ago was a blip on the radar, today it is front and center. Larger banks are even partnering and or creating their own FinTech divisions.
Smaller banks are assessing how they can be innovative and competitive within the reality of a digital world. The advantage that smaller banks have is that they can pivot, and their business models are less complex than larger legacy straddled institutions. Regardless of size, the presenters on this topic stated that banks that do not innovate will not exist in ten years. The decision today to learn and understand how best to leverage and monetize technology will determine who thrives and who withers.
The presenters at the conference were consistent in their approach to addressing daunting challenges. Great advice, take small, incremental steps. Use building blocks to take baby steps. Recognize there is an endgame however, the end game is always evolving. Incremental steps allow the bank to pivot as conditions evolve. Invest in people and or 3rd parties that have specific knowledge and skills so that navigation and execution are cost effective and produce cost benefit results. Understanding what gates to pass through, while creating and explaining your technology roadmap to the Board are a must.
For many, the task looks endless. Risk assessments, never ending regulation and regulatory changes. Exams, audits, technology, governmental uncertainty. The list goes on and on. Part of the challenge has been bankers’ stubbornness to take time to understand the perils of the current silo structure in their own institution and how it inhibits them from evolving and becoming more profitable. I believe that this complacency must change, and individuals and department leaders must be convinced to dismantle and abandon inefficient processes. To innovate and evolve, building enterprise awareness is central to that objective. I advise my clients to take small, incremental steps. Banks end up costing themselves a fortune by looking at end state objectives and seeking short cuts to get there. To bank on the future, banks need to have an end state in mind but have the willingness to take the first steps with a minimum solution for today and continue building into the future.
The disruption created by the pandemic slowed the advancement of initiatives such as LIBOR and CECL. Today the LIBOR transition is front and center. The greatest impact falls within the area where banks hedge through derivatives. The higher the banks’ exposure in this area, the greater the impact. Community and small banks should not be complacent. At least take the time to understand the changes, assess if and how it could affect the institution. Regardless of size and exposure, ripple effects resulting from future market shifts will impact bank portfolios. Understanding the transition is part of the responsibility of banking on the future.
Anyone who reads print news and or watches cable business news is aware of the expansion in Diversity, Equity, and Inclusion (known as DEI) activities. Banks have aggressively created DEI officers and departments to strategically implement DEI within their institutions. A panel representing well known NJ banks participated in an informative discussion. They outlined how banks can connect and communicate with the communities that they serve and their internal employee community. Simultaneously they can strategically integrate DEI objectives with their business objectives to have a positive impact on achieving both. Demographics are changing rapidly, and customer preferences are evolving. Hiring considerations coupled with an emphasis on fair lending examinations are front and center. Do not stress. Be innovative and creative. This is new, the subject is complicated and controversial. Mistakes will happen and adjustments will be made. Seek opportunity and keep an open mind. This is a concerted effort to help those that have been underserved in society. NJ Bankers has created a DEI council to provide education and support to member firms that I highly recommend that you check out. There are also many associations representing minority consumer and business groups that are available for guidance.
Industrial hemp has been deregulated and thirty-eight states have legalized cannabis for medical uses, recreational uses, or both. Yet it remains a complex topic with numerous variables, even in deep blue states like NJ with one-party controlling the state legislature. My takeaway from this session was that bank risk lies in several key areas:
· State laws for banks servicing cannabis consumers and businesses vary.
· AML/BSA sits at the top of the risk chain.
· Loan recovery, extraction of the bank from business relationships, collateral security, and questions of collateral seizure looms large.
· Industry risk assessments are in early development but there are some experienced players.
Marijuana Related Businesses (also known as MRB’s) fall into several categories. The category a business is classified to be in equates to different risks based on that category. Banks that want to enter this opportunistic market need to do their homework and risk assessment. Do they have or can they obtain the personnel and independence to comply with the requirements? A lot of legal eagles still circle. However, state courts so far have sided with banks in legal disputes regarding the legality of financing and providing financial services to MRB’s. A bill called the “Safe Banking Act” is slowly making its way through Congress. The purpose of the bill is to relieve banks of uncertainty and provide legal immunity. The bill will provide handrails and inform banks of where lines are drawn. For banks that want to be aggressive, I encourage you to discuss this topic internally in your audit, risk, and executive committee meetings. A way to get information, answer questions and minimize ambiguity is to send emails on the subject to your regulators. They will not condone or sign off on anything, but they may provide you with some green, yellow, and red-light parameters.
The Wall Street Journal published a piece over the weekend that discussed the dollar value of bank mergers in 2021. It is the highest it has been in years but not the highest in terms of number of deals. Current activity is being influenced by new bank merger rules that are coming soon that will make mergers harder and more burdensome.
The industry continues to witness a decades long decline in the number of institutions doing business. As consolidation continues, fewer DiNovo’s are appearing. The panel discussed the significance of legal leeway that bank Boards have in executing the purchase or sale of a bank. Boards have a lot of discretion when determining whether to buy or sell the bank. The Boards prerogative is to deliver value to shareholders. Boards are obligated to get a fair price, not the highest price. In today’s environment, making informed decisions regarding that value are challenging. Today, it’s widely understood that unprecedented accommodative monetary policies, low rates, as well as business and societal fatigue factor into: What is the bank worth? What can the bank afford to pay? Valuation is complex in this environment. Other factors that are catalysts for consolidation are succession planning for a new digital generation, regulatory and FinTech challenges, some of which were discussed earlier.
The fiduciary responsibility of the Board is to make an informed decision. A fallacy that the panel discussed is a merger of equals. The moderator of this segment said there is no such thing. Both parties must be comfortable with the new structure and how it will look once the new structure is complete. Culture, people, and trust. These three things must be right for a successful merger.
Sooner or later the stimulus will run out, rates will rise. Will loan growth slow? It is not just the markets that are evolving. You can bet that banking on the future includes a revolutionary mindset of defining its market. The innovators and open minded that act in the present, will prevail in the future. You Can Bank on That!
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