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 / Winter 2009 / Issue 57(originally published by Booz & Company)


What Banking Needs to Become

Numerous banks will thus seek to develop better operational and IT management capabilities to cut costs. This represents a major opportunity for them: They can reinvent their systems architectures, replace core mainframes that date back to the 1970s or earlier, and realign the structure of the business around customer needs. A clear differentiation will likely emerge between the banks that have the resources and drive to take this opportunity and those that don’t.

Asset and liability management. Easy access to low-cost wholesale capital during the pre-crisis era caused many banks to lose sight of the role of deposits as a critical source of funding. Too often, deposits were managed in a fragmented manner across multiple lines of business. Now, however, banks must manage their cash holistically. The banks that do this well will have a distinct advantage, and some will emerge as aggressors in M&A deals.

The recent dramatic rise in saving rates in Europe and North America represents another major opportu­nity for banks to shore up a critical gap in their customer offerings while more proactively managing a core element of their funding mix. Capturing these new deposits will require banks to apply a level of sophistication to product innovation, pricing, and customer analytics that was previously applied only to the lending side.

Capital management and portfolio strategy. Capital is now acknowledged as a critical strategic asset and needs to be managed as such. A restricted flow of capital destroyed institutions such as Bear Stearns and Lehman Brothers, whereas more savvy stewards of capital, such as JPMorgan Chase and Goldman Sachs, are emerging from the crisis as clear winners.

But it won’t be enough to manage capital strategically. To securely fund business growth in the coming era, banks will have to diversify their funding base. For debt, this will mean diversifying duration; in fact, regulators in some countries are already moving to mandate longer-term requirements. For equity, it will mean thinking ahead about alternative sources of capital, including strategic investors and sovereign wealth funds, before they are needed.

Banks must also effectively communicate their strategy to investors, particularly as they seek to expand. Big is not necessarily beautiful anymore; shareholders will no longer tolerate empire building for its own sake. They will expect to see a compelling business case for each M&A deal, as well as subsequent reporting on a deal’s performance.

At the same time, as noted earlier, the old promise of low risk and high return has proven illusory. Shareholders in many countries are now presented with a less attractive, although possibly more sustainable, opportunity: low risk, low return, low volatility. Banks need to set this expectation as part of their branding and manage it actively.

Talent management. The last decade of banking has seen an increase in hiring from outside the financial-services sector, focused on functional skills like marketing that were thought to be transferable. Today, banks need more comprehensive industry-related expertise; a single executive might need to be fluent in customer analytics, asset and liability management, distribution, products, and operations. This highlights the value of a more traditional rotation model, in which well-rounded, high-potential bankers are groomed for senior leadership by being asked to serve in multiple functions during their careers. And it reinforces a shift that is already under way, from talent recruitment to talent retention and development.

Important cultural changes will also be required in the aftermath of the current crisis. The need for a holistic view requires effective teaming at senior levels and the elimination of the “cult of the leader” phenomenon that creates barriers to collaborative management. As banks become more outwardly focused, they will also need people who can understand customers more easily, and who can work with regulators, investors, and communities in a more inclusive way.

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  1. Shumeet Banerji, Paul Leinwand, and Cesare R. Mainardi, Cut Costs, Grow Stronger (Harvard Business Press, electronic book, 2009): Step-by-step insights for reducing expenses dramatically by focusing on a coherent system of capabilities.
  2. Alan Gemes, Peter Golder, and Thorsten Liebert, “Global Financial Governance: Improving Stability and Mitigating Future Threats,” Booz & Company white paper, September 2009: Basic principles for the next generation of financial-services regulation.
  3. Henry Kaufman, The Road to Financial Reformation: Warnings, Consequences, Reforms (Wiley, 2009): A banker’s perspective on thehistorical precedents for the current crisis, its likely aftermath, and the impact on regulation and the industry.
  4. Yoshiyuki Kishimoto, Hiroyuki Sawada, and Chieko Matsuda, “Follow the Customer, Follow the Car,” s+b Leading Ideas Online, 12/17/08: Lessons from Japan’s “lost decade” reinforce the imperative of being close to the customer and the dangers of excess capital.
  5. Andrew Turnbull, “Is State Control Making a Comeback?s+b Leading Ideas Online, 04/28/09: Why permanent government control of banks is unlikely — but a new regulatory environment is assured.
  6. For more thought leadership on this topic, see the s+b website at:
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