Jeff Judy

Jeff's Thoughts - December 22 , 2010

Betting on the Next Sure Thing?

Running a bank means crafting strategies to match predicted conditions, to anticipate challenges and opportunities. To be frank, for many banks, "predicted conditions" means "more of the same." There's nothing we like better, in this industry, than at least the perception of stability.

So, when the economy was running well, banks developed strategies around the assumption that it would continue to run at full steam. Then the economy collapsed and banks faced stiff regulatory scrutiny and a new legislative landscape. With the slow pace of the recovery, leadership teams at many institutions are, again, expecting "more of the same."

Even if the new legislation and attention from the regulators may be a bit uncomfortable, these institutions are betting that they at least define the playing field for the foreseeable future. Better the devil they know, they think, and thank heaven for a little stability, at least.

Very little, in my view.

Among the most obvious lessons of the last couple of years must be the fact that our industry is the subject of political debate to a degree we have not seen in a long time. While we have always lived with government oversight and changing guidance, the impact of government decisions on how we do business has escalated spectacularly since the economic crisis struck. Regulators are asserting their views with much more energy at the same time that legislators are establishing new rules, new oversight, and new conditions on banking.

The mistake some bank leaders are making is in thinking, "At least we have a new set of rules to guide us, whether we like all of them or not." But those rules, and regulators' interpretation of the rules of our industry, will continue to be volatile for some time.

First, there are the tweaks and reversals that are inevitable when the landscape shifts as dramatically as it has for our industry of late. Some of those new laws, and some of the regulators' new ideas, will undergo significant revision as we all see how they play out in practice. So much has changed so fast that further change, in the nature of "course corrections," cannot be avoided.

Second, and more important, is the recent shift in the political landscape. Who is in charge, politically, has changed at the national level, and in many states as well. New legislators may not only be from a different party, but may even be outside the mainstream of their own party.

The result is a perfect recipe for volatility, for starts and stops, for advances and reversals as new government leaders find their way to common ground. In a word, uncertainty, rather than stability, will prevail. And given the emotional views that surround the financial services industry, our best strategy is to be ready for further changes.

It is time to explicitly prepare for a continually changing business landscape. Rather than betting on a particular business scenario, your strategies should reflect the high probability the scenario will change, probably more than once, in the coming year or two.

It is time to put aside the idea that knowing the current rules of the game is enough for effective business planning. Your best approach is to deliberately cultivate a culture of responsiveness and flexibility throughout your entire organization.

Knowing the future is a wonderful thing. But for next couple of years, knowing how to respond to an uncertain and changing future will be even more wonderful. By the time stable, predictable conditions return, the banks that have explicitly nurtured a new level of flexibility will have already beat their competitors.