Banks at the Nexus of Three Critical Forces

The banking industry is enmeshed in three high-profile challenges facing the country. The coronavirus response and recovery, continued political disparity, and social and racial imbalances have created a nexus of critical intersecting forces that promise to shape the bank space.

Independently, each of these challenges present strong personal and emotional dynamics. Their combination and intersection produce an environment for which there is little, if any, historical experience. Bank executives and directors will be required to address these critical strategic and tactical matters that will alter the finance industry for years to come.

Post-Coronavirus Response, Recovery
Banks have employed significant strategic and tactical responses during the Covid-19 pandemic. Relying on virtual solutions for many aspects of both consumer and commercial banking requires management teams to constantly assess their service delivery frameworks, technology platforms, and human and capital resources. In many instances, these solutions sufficiently address customer needs, becoming basic expectations for them.

Further, and yet to be more fully understood, is the real effect of the broad range of government stimuli on bank liquidity and credit performance. Leadership teams will undoubtedly need to respond to a prolonged period of low interest rates, depressed margins and limited demand for quality credit, well beyond the expiration of consumer subsidies and government-guaranteed loan programs.

Political Disparity
Regardless of the outcome, the November election is likely to widen the political disparity that has become the norm in the U.S. Within this disparity lie the critical diametric views and approaches to bank regulation, consumer finance protection, the fate of the housing finance industry and fiscal policy.

The current administration has afforded banks a more accommodative regulatory framework that has enabled notable growth, increased capital levels and fostered a robust mergers and acquisitions environment. However, some argue that this period of deregulation has contributed to reduced access to banking products and services for many, and a return to the “Too Big to Fail” environment that existed prior to the Great Recession.

Another question is the resolution of the government sponsored mortgage entities (GSEs) that are currently in government conservatorship. The current administration has advocated for privatization of these entities; the opposition remains committed to a deep government presence in residential housing finance. Notwithstanding the relative decline of the presence of banks in the mortgage sector, the answer to this question remains critical to how banks will participate in what remains a cornerstone of the U.S. economy.

Finally, monetary policy managed by the Federal Reserve has become much more politicized during the current administration. A continued shift in this direction will be particularly important to banks.

Social, Racial Imbalance
Events in recent months have brought to the surface the depth of the social and racial imbalances in our country. The responses and the critical calls to action require much from leaders in commerce, including banks, to lead the cultural shift.

Banks occupy a unique position: They serve as an integral pathway for consumers and businesses, regardless of ethnic background, race or socio-economic class, to pursue and achieve financial stability. Without question, many banks have dedicated significant capital and human resources to broadening access to banking products and services for all people. At the same time, most banking leaders agree that more can and will be done. Many believe a more focused approach to increasing opportunities for people of color to pursue careers in the banking industry is a critical component of the broader solution.

Each of these efforts is essential. But most important is the recognition that the social and racial imbalance that exists in our country today will hamper the long-term viability and success of the banking industry.

Three Critical Questions
Consider these questions, given the current state of these three high-profile intersecting challenges:

  • Can the banking industry achieve long-term sustainable growth and profitability without a notable breakdown of social and racial imbalance?
  • Does a partial or complete change in government administration following the November election accelerate or deter the potential post-pandemic recovery in 2021?
  • What are the most critical barriers to the banking industry’s ability to actively contribute to the Covid-19 recovery, and to the reduction of social and racial imbalances?

Tim Kosiek