How to Pursue the Long-Term Strategy and Avoid The Big Short

Business and economics are at an inflection point. Hard trends like technology, globalization, and access to information have continued to evolve at such an accelerating rate that decisions about increasingly complex scenarios are being made faster than ever.

Throughout history, we’ve seen that banks have been particularly susceptible to inclinations in the economy and vulnerable to the effects of regulations. Particularly in this current global environment, the ‘follow the herd’ mentality is dangerous for banks. 

We don’t have to look all that far back to see why it’s so important for the leaders of financial institutions to make sure that the C-suite, board, and other stakeholders are very clear on the identity and the long-term goals of the institution. Take the housing crisis, which was precipitated by a general consensus among the federal government that everyone should be entitled to have a home.

Regardless of whether someone could qualify for a loan or sustain the payments, banks were pressured to help put people into homes. Following the trend and the ease of selling these loans into the market, many banks turned from their core focus areas, long-term strategies, and even core values to make sub-prime loans.

What happened was an inevitable failure of the system, and the public suffered. The movie The Big Short does a great job of profiling this situation. In it, Wall Street guru Michael Burry realizes that a number of subprime home loans are in danger of defaulting. He bets against the housing market, throwing more than $1 billion of his investors' money into credit default swaps. His actions attract the attention of a group of opportunistic bankers and hedge fund professionals, and the group makes a fortune on the crumbling American real estate economy.

Looking to the present, we see other variables that warrant a reminder for banks to stay the course. Interest rates, which have been suppressed for a decade, remain at historic lows. Whether that is due to geopolitical and global economic concerns, inertia, or other factors, it’s having an impact on how banks make a profit. Specifically, the low rates mean a tight interest rate spread. That challenge is forcing some banks to make uncommon decisions like removing credit spreads from loan interest rates and/or extending the term of a loan’s fixed rates to provide loan growth in the near term but poses real danger to the institution’s long-term profitability.

It’s highly unlikely that we’ll ever reach a point of economic, political, or business equilibrium. But significant change points such as we’re experiencing now provide a great reminder of how important it is for banks to define and then stay true to their core offerings and values. Chances are, you already know this.

Here are a few ways you can act on that conviction when external factors are pulling you to make decisions that are in direct contrast to your strategic vision.

• Don’t be swayed by competition or what may make you attractive to stakeholders today.
• Know your identity and true strategic plan. Stay true to that. The banks that survived the financial crisis were the ones that stayed focused on their core strengths. They were able to recover more quickly and it lessened the impact.
• Filter trends through your strategic vision and plan. Ask how it will enhance the value of the bank and shareholders.
• Know how a decision fits into your profitability, asset quality, and culture over the long-term.
• Involve your key stakeholders in making decisions.

Bottom line is that the banks that sustain profitability take a windshield view. They’re courageous enough to listen to the right advisors and to consider the ripple effect of every decision. History shows what can happen when we do – and when we don’t – stay on course to the future.

Join the conversation and receive updates of new posts: