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Veteran banker tackles industry shortcomings

Book Review: How banks can make their future brighter

Broke: America’s Banking System: Common Sense Ideas To Fix Banking In America. By Richard J. Parsons. Risk Management Association. 181 pp. Broke: America’s Banking System: Common Sense Ideas To Fix Banking In America. By Richard J. Parsons. Risk Management Association. 181 pp.

Refreshingly, Richard Parson’s Broke: America’s Banking System is not the more or less typical retrospective of the Great Recession and the enumeration of the difficulties experienced by the financial service industry. It’s not a “show and tell” of greed and avarice. One recent count says there are over 300 of those out there now.

Rather, Broke is an authoritatively written, wide-angle perspective perhaps best summarized by the late cartoonist Walt Kelly’s trademark line: “We have met the enemy and he is us.” 

But, more importantly, Parsons suggests what can be done about this.

One of our own

Importantly, Parsons is an “us.” The book is an inside-outside point of view by a senior bank executive who has experienced the events of the last 35 years firsthand. Parsons’ book proposes a wide range of related activities around which our banking system and its supervisory structures should be reengineered and rethought—including the political context in which banking is operated and regulated.

Parsons is a recently retired executive vice-president at Bank of America. He rose steadily through the managerial ranks and is a veteran of many types of financial experience, ranging from community banking and credit underwriting to P&L responsibility for a variety of business lines. He speaks from broad experience and the perspective of a veteran of the crises of our industry dating from the 1980s.

He says he left day-to-day banking in order to study his industry and see how it could be improved. (You can read more about him on LinkedIn and on his own website.) Broke consists of the observations and suggestions he came up with, and they are well worth reading. 

We have a talent shortage and it’s acute

The author has a clever way of making this point—at all levels of our industry—by using the analogy of a professional sports franchise.

The success of any pro sports franchise consists of a delicate balance of ingredients: qualified athletes, numbers of fans willing to pay to attend games, qualified referees and umpires, and owners willing to take risks for a commensurate financial reward. If any of these factors are not in some sort of balance, the results are subpar. Not enough fans and teams play to half-empty stadiums. Not enough referees, and a game risks the loss of its professional luster. Insufficiently talented athletes, and the fans won’t pay for consistently mediocre performances.

A bank is in its own way quite similar.

It requires talented employees, talented managers, sufficient numbers of customers, directors who can govern, and a template of constructive regulatory oversight so that these constituencies exist in some sort of reasonable balance. We seem to have had difficulties in recent years in getting these factors sized properly. The result? Our collective industry performance has been inconsistent and in many instances dramatically unsatisfactory.

As our industry has consolidated primarily through the impacts of technology, we have run many qualified and experienced people out of the business through layoffs and attrition. Then, about 20 years ago, as Parsons recounts, banks started to dismantle or starve internal training programs that historically had developed generations of lenders. These activities had a technological impetus as credit scoring systems reduced the immediate need for a predictable stream of trained credit analysts and underwriters. Bank delivery systems of credit services became branch or retail products and were increasingly delivered by staff with lower levels of functional credit experience.

The talent shortage isn’t limited to bankers with credit skills. The skill sets needed to competently run a large financial service enterprise are always pressing and acute as talented people with fungible skills can find satisfying work doing similar sorts of things in non-banking enterprises.

We have a shortage of qualified directors

Parsons has a great deal to say about directorship, with two entire chapters devoted to the subject, and many other references.

Bank directorships are positions of considerable responsibility. Yet so many banks, particularly at the community bank level, treat directors as volunteers, as demonstrated by the nominal compensation they receive relative to the responsibilities they undertake.

Relatively few occupying these positions today possess any formal training. Firsthand knowledge of the banking environment from a community perspective remains important. But no longer should it be the primary qualification for service on a bank board. In a risk management environment, the job is much more complex.

A telling comment from Parsons regarding prequalifications to being a bank board member: “… if someone has the time and is honest, he or she is qualified  to be a director of a U.S. bank. Standards and testing for basic knowledge do not exist. Individual banks’ board-nominating committees presumably establish their own definition and test. … Despite our nation’s history of high bank failure rates, we see little evidence that director selection has evolved from the 1950s era of paint-by-number banking.”

The author makes a strong point that the entry of de novo banks into the banking system further tightens the labor market, draining talent away from existing institutions. There are extensive and interesting tabulations of de novo banking activity that appear correlated with bank failures in selected state jurisdictions.

Bankers and bank directors should be “certified”

The experience and competence levels of bankers vary widely between large and small banks. Their abilities to detect and anticipate risk, especially the very large systemic risks, are not well developed and their record of accomplishment has been woefully deficient during this last economic cycle. While the very large banks devote considerable resources to this effort, the smaller banks cannot. In part this is due to lack of knowledge of where to effectively begin the process and the lack of resources that can economically be devoted to this activity, while struggling to achieve a reasonable return on equity.

The author makes a convincing argument that self-policing of the banking industry in this manner by bankers would be a convincing response to our many critics who have charged that we succumbed in recent years to the temptations of greed and avarice. Parsons provides serious food for thought: What more serious and credible efforts might we undertake demonstrating that we are serious about true reform and restructuring our business models?

Bank directors face similar needs as bank officers for formal, structured assistance in the technical aspects of banking. They do not have the right to “bet the bank,” whether they do so by the unwitting adoption of certain risk-taking strategies, or by exercising oversight they are clearly not qualified for. They have serious gaps in their knowledge and understanding of how the banking business works as it relates to the management of risk.

Our regulatory structures are obsolete and should be changed

The talent shortage isn’t limited to officers and directors, in Parsons’ view. The regulatory community is experiencing a similar decline in its available talent pool as well, during an environment where regulatory demands are evolving in complexity and scale. But Parsons sees the need for more fundamental change.

While Parsons knows well the industry’s regulatory challenges, he does more than merely recite the inventory of burden. While regulatory oversight has been significantly changed due to the passage of the Dodd-Frank legislation, the author draws a fascinating analogy about the nation’s banking history, starting with the congressional revocation of the Charter of the Bank of the United States.

At the time, this marked the end of any move toward a consolidation of banking power and influence and reflected the political mood of a largely agrarian society at the beginning of the middle years of the 19th century.

Events culminated during the Civil War that caused President Lincoln to call for the National Banking Act that is largely understood as creating the vehicle for financing the war by the Northern. It also marked the beginning of a pattern of successive banking regulation, including such significant legislation as the Federal Reserve Act, the Glass-Steagall Act, the establishment of FDIC, and most recently Dodd-Frank.

Parsons points out that each major piece of legislation was introduced addressing one or a combination of issues needing attention at the time, but leaving previous legislative initiatives largely intact. The author likened this to a house whose construction began in 1863 (the National Banking Act) with each major banking law in succeeding years being an add-on to the original structure—each a single-purpose room.

Before too long, following this analogy, there existed a Federal Reserve Room, an FDIC Room, and so on, each designed with a specific purpose in mind but not considering the totality of the regulatory challenges represented by each of the other rooms. The result is a dysfunctional architectural composite that lacks harmony within its own wall and that fails to harmonize with the existing reality of the times.

The recent history of the patchwork form of banking organization and regulation this country maintains has resulted in inconsistent quality of bank examinations and individual and composite assessments of safety and soundness. Overlapping and confusing accountability and authority can be destabilizing, in Parson’s view. He believes this has contributed in some significant ways to the dysfunctional supervisory environment of the recent past.

The author also joins the proponents of change for the way safety and soundness is calculated and communicated among banking supervisors and between and among the regulators and the regulated. The CAMELS rating, he maintains, is largely “backward looking” and should be revised to include more forward-looking elements of review, including new ways of anticipating and identifying emerging risk areas.

Is banking regulation up to the task?

Sheila Bair’s book, Bull By The Horns, published two years ago, paints a vivid picture of regulatory bodies not only not coordinating their activities, but in many cases overtly and deliberately failing to cooperate with each other. If the primary purpose of bank supervision is to reduce systemic risk, then this condition undermines a critical component of bank supervisory expectations and results.

Indeed, Parson believes that the varying economic results of banking activity across the 50 states make it clear that our current system isn’t working. There are wide variations among the states in failures, new charters, and individual bank profitability. The lack of consistency suggests that the system is not capable of achieving sustainable and superior results nationally and that our overall results are inhibited in unknown and perhaps substantial ways.

He has deep concern about the viability of the community banking portion of our industry. Part of this is the burden of regulation—the mindless sort of routines that tend to apply regardless of institutional size or the relative threat of systemic risk.

The community banks in the United States are where the majority of small business credit is originated and serviced. To not protect and nurture this part of our overall national entrepreneurial infrastructure is very short sighted, Parsons argues.

Yet, lack of regulatory cooperation, married to regulatory deadlock, makes overall accountability murky. Who has the overall responsibility of getting the process of risk identification and management right? The answer to that question should be very clear to all parties and participants—but it isn’t.

One question that should be revisited is the degree to which banks should be saddled with social issues such as the Community Reinvestment Act and disparate impact concerns. These questions are different from the currently contested issues of what constitutes appropriate residential mortgage origination practices or issues addressed in anti-discrimination laws and truth in lending considerations.

Imposing such burdens on banks leads to unintended consequences. Parsons argues that banks were drawn into in the implementation of increasingly aggressive (and risky) home ownership penetration rates of those of lower income through political manipulation of the government sponsored entities (GSEs)  Fannie Mae and Freddie Mac over the last 20 or so years. The resulting problems were foreseeable—and in fact foreseen by many—and completely avoidable, had there been a more sensible application of “social expectations” by the legislators.

A worthwhile read for officers and directors

Broke is a remarkable little volume with value and indeed wisdom for all participants in America’s banking industry.

My only quibble is over the price that the Risk Management Association charges. The per copy price tag of $35 probably limits the extent of its distribution. Perhaps RMA should consider publishing this book through e-book distribution channels to lower the cost and widen its access to more participant/readers.

Many players should be reading this book.

If you'd like to join our corps of book reviewers, please email This email address is being protected from spambots. You need JavaScript enabled to view it., executive editor and digital content manager, and describe the types of books you like to read for business, the most recent such book you've read, and whether you have written for publication before.

Ed O’Leary

ABA Banking Journal Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent more than 40 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses and has been a frequent speaker in ABA's Bank Director Telephone Briefing series. You can e-mail him at etoleary@att.net. O'Leary's website can be found at www.etoleary.com.

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