What is the biggest challenge facing bank directors today?
The list of possible answers is pretty long. Is it the continuation of a low interest rates squeezing net interest margins for years? The cost of all the new regulations since the financial crisis? The cybersecurity cat-and-mouse game, where the hackers always seem to be one step ahead of you? Or is it keeping pace with the rapid changes in digital technology, particularly in the mobile space?
All of those are very plausible answers, but I’d like to suggest another one—preparing for the future. I think that most bank boards spend their time on what’s happening today in their institutions and relatively little time thinking about the future, and by that I mean looking deep into the future—10 years out, where emerging trends can have a transformative impact on the entire industry. There are reasons for this, of course. Today’s operating environment for banks is challenging, so it’s not surprising that bank boards tend to place most of their focus on performance issues, particularly at public companies. Boards do engage in strategic planning on an annual basis, and the resultant business plans often have a five-year time horizon, but they are usually based on what the bank will do in the current environment. It’s harder to understand how larger, more systemic issues will impact the bank.
Bank Director will hold its third annual Bank Board Training Forum on September 29-30 in Chicago. This event was designed to be a little different than our other events, which focus on specific activities like risk management, compensation and mergers and acquisitions, and often appeal to senior executives or directors who are focused on that one issue. The Training Forum, by contrast, looks at a wide range of issues that impact the entire board, and tries to synthesize those into a holistic view for all of the directors.
In the spirit of that approach, I will be giving a presentation on the future of banking 10 years out. Of course, 10 years is a big chunk of time, so any predictions one makes today could very well turn out to be wrong. For example, who would have predicted the following in 2006?
- The worst financial crisis since the Great Depression.
- The total collapse of the U.S. housing market.
- The Dodd-Frank Act and Basel III. However, if you had predicted the crisis, then you could have predicted with reasonable certainty that regulatory consequences would follow, since history shows this to be the case.
- The over-the-top popularity of smartphones and their impact on banking and just about everything else. In fact, Apple didn’t introduce the iPhone until 2007.
- An emerging financial technology sector which is beginning to revolutionize banking.
It’s not that some of these transformative trends or events weren’t already in evidence 10 years ago. A minority of economists were concerned in 2006 that the Federal Reserve’s accommodative monetary policy of low interest rates was creating a bubble in housing prices, but even they did not predict the cataclysm that later occurred. And smartphones had already been on the market for a couple of years in 2006, but their numbers were small and their capabilities limited compared to their market dominance today.
If predictions about the future are hard to make, I don’t think the predictions themselves are as important as the process of constantly looking forward. A board that has its eye on the future as well as the present is going to be better prepared to react to changing circumstances.
As for what I think the next 10 years has in store for banking, those will come in a later post.