Jeff Judy

Jeff's Thoughts - June 9 , 2010

KISS Your Staff

There are many lessons to be learned from the challenges our industry has faced (and, in some instances, created) in the last couple of years. Analysis of what has gone wrong, in your own institution and in others, can be a powerful aid to devising better strategies and superior practices and processes.

Unfortunately, lessons are not truly learned until they are effectively and clearly communicated to your front line staff and internalized by them.

I was reminded of this recently as I read an FDIC report on a failed bank. The report ran 30 pages, and it was full of numbers, charts, and analysis. Don't get me wrong, there was a lot of valuable information in that report, and it takes that level of analysis to truly understand what went wrong.

But which of the following paths would lead to better results for your bank, going forward:

The popular design acronym KISS is widely interpreted as "Keep It Simple, Stupid" and we would be wise to keep that in mind as we work our way out of the recession. Some talk about the concept of a "mantra," a simple phrase that encapsulates what the institution wants to happen.

As an industry, we love to hide behind numbers. We don't ask a simple question: "Are we concentrating too much credit business in commercial real estate?" We hide behind a threshold: "Does the percentage of CRE outstandings exceed X?" Having a number creates a sense of security and validity that, it turns out, is often completely unjustified.

The problem with numbers is that they are one step removed from reality, if you will, and so it is easy to nudge them along to suit our desires.

When the space shuttle Challenger exploded, the commission investigating the cause of that tragedy included Nobel prize winning physicist Richard Feynman, who wrote about the "enormous differences of opinion as to the probability of a failure with loss of vehicle and of human life. The estimates range from roughly 1 in 100 to 1 in 100,000. The higher figures come from the working engineers, and the very low figures from management." The suspicion is that the pressure management felt to make the launch schedule influenced the numbers used to assess safety, moving them to a point that guaranteed a launch, but didn't protect the crew.

Similarly, if a few more banks had asked a simple question -- "Are some segments making a larger and larger share of our portfolio?" -- instead of trying to justify a higher acceptable concentration threshold because of the revenue it was generating, a few less banks would have disappeared when the recession arrived.

When loan officers bring in transactions for approval, ask them simple questions: "How do you know this borrower will repay us?", "Why do you believe we will make money on this deal?", and most importantly, "What could happen to make you wrong?"

And if you get a lot of detailed presentation of ratios and thresholds and guidance, if the banker works hard to demonstrate that the numbers match those bracketed in some manual somewhere, watch out!

Again, please don't understand me. Thorough credit analysis is a must. Clear guidelines are essential. All of that helps.

But the fortunes of your bank are driven by the simple ideas your bankers carry around in their heads, and they use numbers to rationalize those internalized notions. We all know that there is always a way to work backwards to get the numbers we want.

Let's all learn our lessons from the misfortunes of others, so we do not repeat them in our own institutions. But let's boil those lessons down to simple principles, constantly reinforced, that can guide our employees in their day-to-day work for the bank.