Let’s face it, the financial crisis was a bit of a car wreck. Some institutions were undercapitalized for a stress event, some lending was too risky, and some products and risks were poorly understood. We can all agree that humans are at the wheel of a powerful machine, with the ability to cause severe harm to others, and although we may not have fallen over the edge of the cliff, we came far too close for comfort.
There have been a variety of well-intentioned reactions to prevent a similar catastrophe from occurring again:
Bank Managers erect “guardrails”. Financial Institutions have been rolling out risk appetite metrics, policy stops and limits, and the like. We can compare this to installing guardrails on every single highway, street and alley. Such measures are helpful and justified in many circumstances. They are highly visible and provide us with a sense of security, but are also costly and at times impractical. There is no substitute for good driving.
Regulators disable bank controls. Regulators have put limits and controls on various aspects of lending and operations. This is similar to installing a control on your teenager’s gas pedal, or buying a new car for them with automatic sensors and brakes. In certain cases of troublesome teenage drivers, this is perhaps well advised. But again, there is no substitute for good driving.
Bring along backseat drivers. It is typical in a bank that managers face conflicting business objectives such as volume vs. quality and risk vs. reward. Ideally this tension leads to lively debate, testing, and an optimized outcome. However, in many cases it can lead to squabbling, deadlocks, or overly politicized lending strategy decisions. It’s like having a learner driver with Mom and Dad both in the car. Mom advises the teenager to quickly and efficiently overtake a slow vehicle. At the same time, Dad advises the teenager to simply drop back with ample following distance and slowly reach their destination. There is no substitute for the teenager learning to accurately judge distance, speed, and the car’s acceleration and braking capabilities. That’s right, there is no substitute for good driving.
What do we do BankersLab? Create better drivers.