One Thing That Will Make You a Better Bank CEO


leaders-9-11-18.pngThere’s a reason great leaders also tend to be better than the average Joe and Jane at forecasting the future. As multiple conversations with participants on the first day of the 2018 Bank Board Training Forum in Chicago reveal, effective leadership and accurate predictions seem to derive from the same underlying trait.

For a long time it was believed that forecasting was about as accurate as throwing darts at a dartboard with a blindfold on. It’s common knowledge and running joke, after all, that economists have predicted nine out of the past five recessions.

But a growing body of research, spearheaded by Philip Tetlock, the Annenberg professor at the University of Pennsylvania’s Wharton School of Business, has found not only that some people are better at forecasting than others, but also that certain traits make some better at predicting the future than others.

What’s that important trait?
Tetlock refers to it as perpetual beta—“the degree to which one is committed to belief updating and self-improvement.” In other words, if you’re dedicated to constantly learning and accumulating knowledge, chances are you’ll be better at predicting the future than an ordinary person.

Perpetual beta isn’t just slightly more important than other traits; it’s vastly more important. “It is roughly three times as powerful a predictor as its closest rival, intelligence,” Tetlock wrote in his book Superforecasting: The Art and Science of Prediction.

This is interesting in and of itself, but what makes it more interesting is this idea of constant improvement and knowledge accumulation also happens to be one of the most robust commonalities of great bankers.

Bank Director CEO Al Dominick noted this in his opening remarks at this year’s training forum, when he talked about the three traits of top bank boards. No. 2 was cultivating curiosity—embracing a learner’s mindset.

It was also a theme that coursed through the keynote conversation with Katherine Quinn, vice chairman and chief administrative officer of U.S. Bancorp, the fifth-largest commercial bank in the country and long one of the best-performing companies in the industry.

Quinn took it one step further, connecting the dots between diversity, knowledge and decision-making. The more diverse your employee base is, she explained, the wider the spectrum of ideas your organization will be exposed to, making it more likely you’ll arrive at the optimal solution to whatever issues you need to address.

The connection between constant learning and effective leadership was also a point that Tom Brown, the founder and CEO of Second Curve Capital, a hedge fund that invests in publicly traded financial services companies, made in a conversation on the sidelines of this year’s training forum.

Brown would know. Walk into the corner office of most superregional or major money center banks and the chances are good that, at one time or another, he has been there.

So, how do you pursue knowledge and get others in your organization to follow suit? You have to read—a lot. It sounds simple, but it’s incredibly powerful.

Asked once for advice on how to become a successful investor, Warren Buffett, the chairman and CEO of Berkshire Hathaway, pointed to a stack of papers: “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

You’ll hear the same thing from other extraordinary bankers.

Michael “Mick” Blodnick, the former CEO of Glacier Bancorp, the second best-performing bank of all time based on total shareholder return, spent years staying up late reading about banking. And anyone who worked with Robert Wilmers, the late chairman and CEO of M&T Bank, the top-performing bank of all time, will tell you he was a voracious reader.

And it’s not just about reading either, a point Bank of America chairman and CEO Brian Moynihan made in a recent interview with Bank Director magazine, which will appear in the fourth quarter.

“Reading is a bit of a short-hand for a broader type of curiosity,” said Moynihan. “The reason I attend conferences is to listen to other people, to pick up what they’re talking and thinking about. It’s about being willing to listen to people, think about what they say. It’s about being curious and trying to learn. The minute you quit being educated formally your brain power starts to shrink unless you educate yourself informally.”

Ideas like this can sound trite—a point great CEOs will readily acknowledge—but after hearing it enough times from enough of them and you can’t help but conclude that what’s trite also often tends to be true.

RegTech: A New Name for an Old Friend


regtech-3-20-18.pngWith all of the buzz around regtech, it’s easy to forget that banks have leveraged technology for compliance and reporting for decades. But thanks to recent developments in data architecture, artificial intelligence and more, regtech is on the rise, and it’s evolving into something a lot more sophisticated.

The definition of regtech is simple. According to New-York-based analytics firm CB Insights, regtech is “technology that addresses regulatory challenges and facilitates the delivery of compliance requirements.” Regtech can be as simple as using an Excel spreadsheet for financial reporting or as complex as using adaptive algorithms to monitor markets. By studying the evolution of regtech, banks can begin to decipher which technologies are aspirational and which ones are crucial to navigating today’s demanding regulatory regime.

Regtech has and is evolving in three key phases, according to the CFA Institute Research Foundation, a nonprofit research group in Charlottesville, Virginia. The first phase was focused on quantifying and monitoring credit and market risks. A powerful illustration of the forces driving this initial phase can be seen in the Basel II accord, which was published in 2004. Basel II focused on three pillars: minimum capital requirements, supervisory review by regulators and disclosure requirements meant to enhance market discipline.

Despite the enhanced regulatory requirements of Basel II, the global financial crisis of 2008 exposed serious deficiencies in capital requirements that spurred the second and current phase of regtech’s evolution. New anti-money laundering (AML) and Know Your Customer (KYC) laws have drastically increased compliance costs. According to Medici, a financial media company, financial institutions spend more than $70 billion annually on compliance. In addition, increased fines for banks, new capital requirements and stress testing have resulted in a heavily burdened banking system. With increased regulatory requirements, we have seen a corresponding increase in technology solutions poised to meet them. The following are a few key areas banks should explore:

  • Modeling and Forecasting: Even if your bank is not subject to the Dodd-Frank Act Stress Test (DFAST) or Comprehensive Capital Analysis and Review (CCAR), it should still be able to leverage modeling and forecasting tools to manage liquidity, meet CECL (current expected credit loss) accounting standards and monitor important trends.
  • KYC/AML: Regulatory requirements that require your financial institution to “know your customer” when you onboard them often rely heavily on paper-based processes and duplicative tasks. In addition, the Bank Secrecy Act requires banks to perform intense transaction monitoring to help prevent fraud. Both of these obligations can be curtailed through the use of technology, and solutions are available to digitize client onboarding and use AI to monitor transactions.
  • Monitoring Regulations: Rules and regulations are being promulgated and revised at a rapid pace. Instead of hiring a cadre of attorneys to keep up, banks can use regtech to monitor requirements and recommend actions to keep the bank in compliance.

Banking is, by necessity, a risk-averse industry. As such, taking a leap with companies that will touch bank data, gather information from back-office software or deploy AI can seem like a scary proposition. Some regtech providers on the marketplace today are new, but some were forged through the fires of the financial crisis, and others are time-tested vendors that have been around for decades. Whether a regtech partner is established or emerging, banks can (and should) hedge their bets by communicating with their regulators and forming a plan to monitor the new technology.

The CFA Institute Research Foundation posits that we are on the precipice of phase three in the evolution of regtech. This future state will be marked by a need for regulators to develop a means of processing the large amounts of data that regtech solutions generate. In addition, regtech has the potential to enable real-time monitoring. Both advancements will require a rethinking of the regulatory framework, and more openness between banks and regulators.

Despite the portmanteau (which is usually reserved for new or unfamiliar concepts), regtech is an old friend to the banking industry. Its future may hold the keys to a new conceptualization of what oversight means. For now, though, regtech represents an opportunity for banks to leverage technology for what it was intended to do: Save humans time, labor and money.