BID® Daily Newsletter
Jul 9, 2007

BID® Daily Newsletter

Jul 9, 2007

LEARNING TO MAKE MISTAKES


Much has been made off Thomas Edison's 2,998 mistakes where he tried to heat various items before coming up with the carbonized cotton filament. Edison recorded and published his failures, as well as his successes knowing that one led to the other. Compare this attribute to banking's great failures and you get a completely different picture. When banks run into problems, it is rarely a result of a single error in judgment. While we have done research on the financial reasons that banks fail (liquidity, fraud and credit quality in that order), today we touch on the psychological characteristics. Having worked with banks in the 80's, we experienced first hand how common mistakes can turn into cataclysmic events. Management cultures that fail usually suffer from one major characteristic – arrogance. The driving force of intelligence, hard work and creativity oftentimes give way to a feeling of superiority. This culture of supremacy has blinded many bank management teams from admitting early on that they have a problem. American Savings, Superior Bank, First Penn, and Continental Bank are all examples where management identified problems early on, but did not take the necessary steps to diagnose and correct them. In each case, it was not one single problem (such as rising rates), but rather a series of problems (liquidity and credit quality) and poor management decisions that caused a downfall. Looking forward over the next 5 years, credit quality is expected to decrease. After such a long string of successful credit quality years, we wonder which banks will see problems early enough and take corrective action. On the other hand, for every bank that has failed, 10 others fail to take enough risk and let opportunity pass them by. This ultimately results in a performance failure. Corporate America is littered with firms that have fallen into this category – Kodak, Xerox and Chrysler to name a few. If banks do not make mistakes, they are not taking enough risk, and not taking enough risk may be the most dangerous type of mistake a bank can make. Bank management that cultivates a culture to allow mistakes, but quickly discloses those mistakes and works on fixing the root causes, will be the one that excels in execution in coming years. Taking a cue from Thomas Edison and developing a problem solving culture is as important as fixing common problems of loan growth and deposit costs.
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