What happened with the recent bank closures in 2023 is all about managing all risks and tackling every aspect of risk—at the same time! As you can see from the various events that led to the closure of several banks, one type of risk led to another in a chain reaction until the regulators closed their doors.

One of the most important things to know about Enterprise Risk Management is that all the risk categories are interrelated. This means that when your institution experiences one type of risk, immediately, or simultaneously, you will experience another type of risk.

Chain of Events

When the Pandemic happened in early 2020, (see blog about how the Pandemic affected all other risk categories), the government’s reaction was to provide the biggest cash stimulus in the history of the country. With the extraordinary influx of cash to individuals and businesses, the financial institutions encountered a tidal wave of cash which represented an “excess” of liquidity (risk). This cash was sitting idle not making any profits for the institutions which led to earnings risk. Then most institutions decided to invest the excess cash, and many chose government securities. The decision of how much to invest, for how long, and in which investments was a crucial management strategic decision and thus strategic risk.

The Decision’s Consequences

Unfortunately, many institutions of all sizes made the wrong decisions. They invested too much of their excess cash for too long of a term, not in a laddered maturity structure, and at extremely low interest rates. But that was better than making zero money on the extra cash, right? However, as a result of the government stimulus, inflation happened. Now, to combat inflation, the Fed started raising interest rates (interest rate risk) at such fast pace that institutions quickly found themselves upside down on the value of their bonds. The Other Than Temporary Impairment (OTTI) happened, and institutions’ balance sheets now showed millions, and for some billions, of dollars in unrealized losses.

This situation became now a liquidity (risk) crisis for certain institutions, and they experienced capital risk when they had to realize the unrealized losses from the sale of their securities. Lastly, when word got out that certain institutions were in need of raising additional capital, the bank experienced a run on their deposits. This is a perfect example of reputation risk. In the end, reputation risk is what sealed the fate of these institutions.

Your Reputation Risk

Your reputation is your most priceless possession, and you must protect it at all costs. You protect your reputation when you establish strong policies, procedures, and safeguards in all areas of risk. You then ensure none of the risk categories start a chain reaction that could end your existence. This blog is a simplistic way to explain what happened to certain regional banks that experienced several risk categories one after another and almost simultaneously for some risk categories.

This catastrophic event serves as a perfect example on how it’s all about managing all risks—at the same time. This is the “M” in the CAMELS ratings that regulators focus on to ensure your Board of Directors and senior leadership—management—can in fact manage all the potential risks your institution faces now and in the future. As an emergency reaction, the government stepped in and created a new program called “Bank Term Fund Program” (BTFP). But institutions must be cautious on using this new liquidity funding source because it may imply a liquidity weakness which creates immediate reputation risk.

The Tone at the Top

Can the Board of Directors and senior leaders tell your institution’s story from the risk perspective? Do you know your unique risks such as portfolio concentration, depositors/relationship concentrations? Do you allocate the appropriate resources to ensure your institution is truly safe and sound from every risk category? Is ERM an afterthought at your institution or is it a monthly Board meeting agenda conversation? The “tone at the top” is crucial to identify, assess, mitigate, monitor, and report all your risks. I encourage you to complete and formalize your ERM Program.

I spoke at a banking association’s workshop for emerging leaders and the event planner asked me a great question, “Where are the emerging leaders in banking?” We discussed the fact that associations work hard to offer quality educational programs for emerging leaders. But attendance is typically lower than they expect. We wondered why this phenomenon is a problem across the nation.

I believe there are several reasons why the emerging leaders don’t participate in these special leadership development programs as much as they should. Below are some of the reasons I observe from our clients under $5 billion in assets:

Emerging leaders are working.

Emerging leaders are running the organization behind the scenes and don’t have time to get away. They occupy entry level, supervisory, and some middle management jobs. They are starting their families and juggling work, family, and community commitments.

There is no money in the budget.

Often there is no money in the budget to attend leadership development focused programs. They are an afterthought. While budgets for certain training to take place, they focus on the technical aspect of the employees’ jobs. The focus on the leadership development of emerging leaders comes second.

Perception that emerging leaders are not loyal.

Financial institutions have been burnt before. They develop a specific emerging leader and just when the employee is ready to take the new job, he or she leaves. The organization is left with no one to occupy the position of an employee who just retired. There is no successor, and they find themselves starting all over again.

Legacy employees don’t leave.

Reasons such as the economic environment, living longer, cost of health insurance, and others, means legacy employees continue to occupy their jobs. I call “legacy employees” those who have been in the same job or same organization for over 20 years and are past the full retirement age.

It starts at the top.

I recently spoke with a CEO who mentioned their institution’s board of directors is comprised of three directors over 60, one over 70, and three over 80 years old! If the Directors are not willing to leave their spots and allow a younger generation to take over, the rest of the institution will follow suit. Why do they not leave? In addition to the reasons stated above that apply to employees, the legacy directors may not fully trust the next generation to take over. When addressing banks, in many instances, these are family-owned and the founders cannot let go because they don’t have successors—or at least successors they trust to take the organization into the future.

The lack of leadership development for the emerging leaders presents a critical risk to community banks and credit unions today and something must be done to change this trend. Below are some ideas you can implement immediately to train the leaders of tomorrow:

Do implement a succession planning process.

The first step is to identify future leaders and successors of key positions in your institution.

Budget for leadership development.

Ensure you budget both for technical training as well as leadership development for the emerging leaders you identify through your succession planning process. In addition, budget for continued leadership development for your senior leadership.

Encourage emerging leaders.

The performance review process is the appropriate time to ask each employee if they aspire to positions of leadership in the future. They don’t necessarily have to desire a senior leadership role. Some of them may be happy to be a supervisor, team lead, or manager of a department. Others may aspire to a “C” level position (i.e., Chief Financial Officer, Chief Credit Officer, etc.).

Mentor future leaders.

Part of a strong Talent Management Program is to establish a formal or informal mentoring program both as you onboard new employees and then as you identify successors. Mentoring employees is part of leadership development.

Hold emerging leaders accountable.

It’s a two-way street. The current senior leadership who mentors and provides opportunities to the emerging leaders must hold them accountable too. The accountability comes in several ways. For example, ask them to share with others what they learned at workshops, seminars, and leadership development programs.

Send them to training.

If you are a senior leader, please send your emerging leaders to leadership development seminars, workshops, and conferences offered by your state associations or other professional institutes. Also, as they grow into their leadership journey, provide executive coaching opportunities so they continue to grow as a leader and learn to deal with special situations.

If you are an emerging leader, go!

If you have been selected to be a successor to a key leadership role or aspire to lead throughout your journey, you must take the time to attend these leadership development opportunities when they present themselves. It is on you to prove and demonstrate to the legacy leaders and board of directors that you can and will take the organization to the next level. Part of demonstrating your desire to lead is to work hard and be loyal to the institution. This is hard to do when the trendy thing to do is to leave a company for the next best opportunity after only a few years of employment. You need to allow your employer time to develop you and to also prove to you that they want you in the organization for the long haul.

So, to answer the question, where are the emerging leaders? If you are reading this article and are currently in leadership, I hope it inspires you to send your emerging leaders to leadership training. If you are an emerging leader, I hope this blog inspires you to go and attend every opportunity you get!

Struggling with succession planning? As always, we’re here to help.