Leading through uncertainty can be as complex as four deaf and blind persons trying to explain how an elephant would look like by merely touching different parts of a wild elephant. I am also, placed in a similar environment. Despite this serious limitation, I will make a bold attempt to handle this topic “Leading through uncertainty” slated for Day 1 under Big Issue Debate in the SIBOS 09.
I would like to take up this discussion in four parts as under:
– Part A Banking Regulation
– Part B Banking Business
– Part C Recipe for Success
– Part D Some introspection
Part A: Banking Regulation
The purpose of any regulation is for solving problems that stakeholder or business alone cannot solve, as well as for making trade-offs among different objectives.
Year 2008 will definitely go down in the history as the year of the greatest financial turmoil. And also as a year of distinct demarcation. Prior to and including year 2008, the financial regulations in most countries were focused on the principle of non-interference but suddenly from the final months of year 2008, the chorus and focus has been on more financial regulation to ensure continuity, safety and strength of markets.
Some of the proposed reforms in financial regulations that are being discussed and expected to protect the financial services industry are:
– Caps on leverage
– Liquidity cushions
– Increases to required capital reserves
– Enhanced disclosures around valuations
– Supervisory colleges of cross border regulators
– Central clearing for over the counter derivatives
– Greater disclosures of off balance sheet vehicles
– Greater clarity about where regulatory responsibilities lie
– Enhanced valuation processes for complex or illiquid assets
– Reform of compensation systems (e.g. bonus payment structures)
– Expansion of regulatory oversight to other areas of financial services not currently regulated.
These reforms by way of increased financial regulations are expected to bring in the following benefits and new initiatives. However, they all depend on the ability of the regulators to comprehensively cover these reforms and also ensure total compliance.
– Restore trust in the banking system
– Mandate greater disclosure from hedge funds
– Maintain overall stability of the financial system
– Monitor risks associated with shadow banking system
– Implementation of compensation policies to support long term shareholder value creation
– Put in place sufficient skills and expertise to keep pace with innovation in the banking system.
Understanding regulatory issues in extreme detail is a prerequisite not only for anticipating risks and opportunities but also for building mutually beneficial relationships, based on trust and transparency, with regulators. Usually the hunt for a detailed understanding should start with an exercise to throw more light on the key regulatory issues that could impact business – now and later.
Part B: Banking Business
A banking organization holds capital to guard against uncertainty. Capital reassures an institution’s depositors, creditors and counterparties and the institution itself that an event such as an unexpected surge in losses or an unanticipated deterioration in earnings will not impair its ability to engage in lending to creditworthy borrowers and protect the savings of its depositors. Hence adequate capital for banking business is a pre-requisite. Such capital adequacy should be revisited regularly through efforts like stress testing to provide for changing times and new evolving risks.
To be relevant, stress tests must probe the consequences of potential shocks that are related to the macroeconomic risks that exist in the actual situation of the country. The process of designing system-wide stress tests therefore typically starts with a discussion of the potential risks faced by the economy. The discussion then suggests that certain types of shocks (e.g. a potential increase in interest rates or a depreciation of the currency) are more likely in the given economy than other types of shocks.
The fact that there are macroeconomic risks that could result in shocks to the financial system does not necessarily mean that the impact of the shocks would be large. The impact can still be small if the exposures in the system are small. It is the purpose of the stress tests to assess how the risks combine with the exposures. The design of stress tests is often an iterative process, since some originally identified risks may lead to relatively small impacts, while some risks originally assessed as small may lead to large impacts if there are substantial exposures.
Even if the exposures are large and stress tests identify a potentially large impact on the financial system, it is the purpose of the other parts of the macro prudential analysis to assess the likelihood that these impacts can be mitigated by prompt action by supervisors and banks.
What makes an organisation the most admired organisation? This question is engaging constantly the attention of bank CEOs as well. According to Fortune Magazine, innovation, people management, and use of corporate assets, social responsibility, and quality of management, financial soundness, and long term investment, quality of products or services and global competitiveness are some of the key issues that should receive focus in the banks to remain as the darling of the market place.
In these days of dramatic corporate collapses, it is rather difficult to prescribe one common medicine for all to succeed. Since the factor admiration may be short lived, it is better to focus on the longevity of companies.
Truly great companies, which really survive several decades in a meaningful way, do not have making money as their overarching goal; their mission would be to make an impact in the chosen field of endeavor in a dramatic manner. Not that they would be averse to profits, or are run as a charity, or select a costlier alternative when a cheaper one will do. Long-termers would decide things on the basis of how it would sustain them in their ability to contribute in a specific industry.
The second feature of long-termers is that they judge themselves and their performance by well-defined internal standards, rather than some externally imposed or assumed standards. “No Fortune prescription or standards”. Their internal standards would be more demanding and less forgiving than external standards, but more closely aligned to their long-term goals.
Long-term companies would encourage and reward scintillating display of skills in their profession. Future leaders would be chosen from among those who exhibit industry-leading skills, consistently and with conspicuous distinction and who respect processes. By definition these processes of building skills and evaluating by well accepted standards take time and a good deal of trust among its constituents.
Long-termers will not be one-man shows, but a solid cadre of skills and attitudes, long-term vision, strict internal standards, leadership with skills. These look like difficult conditions to impose in these days of quarterly results, mass voluntary or induced turnover of skills and spin oriented leadership. Is it not?
The following magic will work for banks in these turbulent times.
Focus on customers
Well. We are all aware customer is the king. When times are not good for everyone, if one can focus on the customers and make him/her satisfied on all counts, we would ensure their continued loyalty when the markets turn positive.
Quality is mantra
Our banks are well advised to ensure that they do not cut corners to make higher margins. If they indulge in, they would lose their customers, markets and the businesses. Therefore, at all costs, they should deliver quality goods / services
Retain key resources
Every business has key resources employed in the business. When times are not so good, tempers might run very high on any issue and the banks should be extra careful in dealing with their key resources. Engage them in meaningful healthy dialogues; take them into confidence; assure them everything would be alright when the markets turn positive for them.
Make both ends meet and be happy
Our banks that remain in business should thank their stars and be extremely happy if they could make their both ends meet. This itself a big gift for their businesses in these testing times. One should be not greedy. We know very well what greed has brought even to the mightiest these days.
Part C: Recipe for success
Many banks would have felt and equated the events during recent times, particularly during 2008 with fighting a global war. Unlike the earlier world wars this global war is related to global economy. In this war, the key and effective weapons are accurate and timely information, a proper understanding and statement of risk and the ability to manage and move ahead cautiously.
Normally best practices would have helped one to get over business competition in normal times. Right now everyone is fighting for survival and hence appropriate business strategy is very much needed to deal with this global war. Only with such a strategy one can ensure safe passage.
Banks instead of succumbing to opt for freezing their operations or cutting back their growth strategies during this period should exploit the business opportunities. Instead of looking at the present scenario and developing cold feet and fear as leading to an economic disaster or failure, one may view the environment as ripe with opportunity and initiate appropriate actions such as the following.
Scan the global environment for possible geographic expansion and investments such as asset acquisitions. They are available at a fraction of their original cost.
Exploit competitor weakness, positioning and uncertainty and lure exceptional talent relatively at a lower cost to company.
Go in for aggressive intensive competitive and growth strategies to achieve higher market share.
Partner with global market players in connected businesses and also with financial institutions to improve margins and ensure continued business performance
Leverage ability of the employees as it is only during critical times such as these, employees produce sterling performance due to fear of job loss
Invest in creation of new assets, new product development, and technology up gradation as the cost of capital is at its historical low.
Rethink and rework on achievements, expectations and targets. Set higher hit rate and win ratio. Only this will ensure maintaining margin and revenue objectives.
The best story of the current market conditions is the world’s developed economies and emerging economies still remain linked. Though protectionism has been advocated by a few, no one is taking them seriously. Business attitudes are slowly rebounding and becoming positively aggressive. The need of the hour is global visibility, liquidity management and flexible technology solutions. If the banks survive this global war, they will make a big kill when the economic rebound takes place. Are they ready?
Part D: Some introspection
We all know the reasons for the melt down of the markets and the massive erosion of private wealth of investors. The financial markets when left to the private sector totally will not always ensure the stability of the financial system and only the governments can provide much needed confidence, strength and support to the financial system in times of adversity.
Credit rating agencies, a very important link in the financial sector, provide independent reports on the credit worthiness of a range of institutions, governments, and public bodies, international and domestic active companies. They produce reports and analysis supporting their rating of credit worthiness. Credit rating agencies could evolve a code of conducts or best practices framework for their business and strictly follow them. These best practices will enable the rating agencies to perform still better in any kind of regulatory regime.
Greediness, failure to learn lessons throughout journey, failure to live up the role of a trustee and arrogance and lack of humility – all led to some of the big names in the financial markets place dismal failure and closure of their shops.
Bankers are supposed to have the skills to predict the markets accurately as they would have all the information at their command. They are also supposed to indulge in research and development studying the markets closely and picking up signals – warming or warning. They should get in to the market at the appropriate time and get out of the market at the right time.
Utilizing this occasion, I would like to share one important lesson I have learnt during my trading days. If the markets behave the way the traders expect, the job of a trader would be made easy. Unfortunately, we know how difficult the job of a trader is. Making money in the markets and all the time is a very difficult proposition. Experienced traders recognize this and provide for this when they approach markets.
Conclusion:
Sticking to the basics and the purpose of their business without succumbing to the pressures and temptations in the market place will enable banks to lead themselves and others through this uncertainty successfully.