JULY 2020
Falling Back on Fundamental Truths

Whatever short-term optimism might have accompanied the flattening of the nation’s Covid-19 curve back in May, after hard-hit states like New York and New Jersey successfully reduced their infection rates, has given way to the sober realization that the pandemic will be with us much longer as cases surge throughout western and southern states, including Florida, Texas and Arizona.

And because we live in such an interconnected country, it is naive to think that infection rates won’t continue to surge unless governments and individuals are willing to make hard choices, some of which involve individual and collective sacrifices. 

The pandemic crisis of 2020 has turned the world of banking upside down, and the future looks very uncertain. The U.S. economy is in a recession of unknown depth and duration, and there is a growing realization that the economy and the virus are inextricably linked. To fully restore one, we have to defeat the other.

These are times when it’s human nature to fall back on fundamental truths. If you’re a religious person, you fall back on faith and prayer. If you’re a doctor, you fall back on science. And if you’re a banker, you fall back on a strong balance sheet. 

The fundamental truths in banking have always been conservative in nature. A disciplined credit culture keeps you out of trouble. An abundance of capital helps you survive if you do get into trouble. And in a low margin business, expense control makes every dollar count. Banks that survived the 2008-09 financial crisis without taking money from the federal government’s Troubled Asset Relief Program had all of these characteristics in some measure. 

The pandemic crisis has thrown the industry one curve ball. Bank loan portfolios are under intense scrutiny not because of a deterioration in credit discipline, as happened during the financial crisis, but because a nationwide lockdown put the economy in deep freeze. Even very good banks are being impacted by that. But credit discipline, capital and efficiency are still strengths that will lead the industry out of this crisis.

Another fundamental truth in banking is the importance of a strong and engaged board of directors, and that has never been more important than it is today. 

The board’s role is not to manage the crisis. Your senior executive team are the firefighters. They’re the ones having daily conversations with borrowers to assess their situation, while also taking extraordinary measures to safeguard the health and safety of the bank’s employees. They are being stretched and challenged unlike any other time in their careers, including the last crisis for those that were working in the industry then.

The board’s role is to listen, encourage, advise and challenge assumptions that seem too optimistic. Because the executive team is so close to the crisis, they benefit from the perspective of directors who are viewing it from a distance. 

And keep your eyes focused on a future that lies beyond the current crisis. Have faith that the pandemic won’t last forever, and prepare for when that day comes.
Jack Milligan is editor-at-large of Bank Director, an information resource for directors and officers of financial companies. You can connect with Jack on Twitter at @BankDirectorEd .

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