Monday, July 25, 2016

Colin Cowherd Thinks Poor Reporting is Bloggers' Fault

Riding my exercise bike over lunch, I often watch The Herd, featuring Colin Cowherd and his co-host, Kristine Leahy. Both are sharp sports minds and I respect their opinions. And oh they have opinions.

What struck me today, and The Herd is supposed to strike a nerve, was Colin's seemingly random comment that the quality of news reporting has degraded as a result, in part, because of bloggers. Hmm, do I degrade the quality of bank reporting because of my blog?

His context was the poor reporting done by Al Jazeera America about the theory that Peyton Manning used PEDs. Al Jazeera America was formed in 2013 when the Qatar based Al Jazeera purchased Al Gore's Current TV. Both are/were news organizations, not blogs. So blame the blog for the poor reporting of a news organization? Reporters that dig no deeper on issues than reading celebrity tweets on the air comes back to bloggers? The irony about The Herd being a three-hour opinion show must be lost on him. 

I do not think blogs degrade news reporting. The Huffington Post, now considered a legitimate news organization, albeit quite left of center, started in 2005 as a blog. Current TV, started as a news organization aimed at a younger audience, was by all measures except one a failure. The exception being the $500 million of Qatar-financed consideration paid to it by Al Jazeera. Funny that their name starts with "Al". But I digress.

I don't want to be presumptuous. But I do not think my blog impacts bank industry reporting in the slightest. American Banker isn't worried about Jeff For Banks jumping them for a story. Or any other financial institution blogger for that matter. In fact, I wouldn't be surprised if some news story ideas emanate from industry bloggers. In that regard, industry news organizations may welcome our existence. But to think that SNL Financial gets a news story out quickly and recklessly so a financial industry blog doesn't get there first is nonsense, in my opinion. I can't think of one example where that was true.

Blogs have different reasons for existing. Some hone writing skills, or simply are hobbies. I do it to increase my knowledge of micro issues, engage with people I wouldn't otherwise know, and hopefully spur discussions among financial institution executives on the future of their institution and our industry. I don't own a fedora, monitor newswires, or watch CNBC, fingers at the ready for my next blog post. I struggle to post three per month.

So Colin, with regard to your theory that bloggers decrease the quality of reporting, your Herd is thin. 

~ Jeff

Thursday, July 14, 2016

Is That a Risky Bank Customer?

Customer risk assessments are a fact of life in banking. Banks must determine how a new customer will affect its overall risk profile. Most, in my experience, do it in the form of a Q&A form, to be filed with the rest of the customer paperwork. What I see as papering the file.

But let's think about how it could and should be.

It is prudent to determine the risk profile of a customer and how it will impact your bank. Taken alone, it is highly unlikely one customer will impact the bank in a significant way. But grouped together, customers with similar profiles that act similarly within the economy can elevate risk. Think loan concentrations. As a matter of course we measure loan concentrations by loan type, such as construction or non-owner occupied real estate.

And there are red-flag industries that elevate risk, such as check cashing or marijuana businesses.

I have written about banks determining their own well-capitalized by allocating capital to different balance sheet categories based on the bank's perceived risk of those categories. It is a top down approach. But what if this analysis starts at the most granular level... every customer? And the bank uses its customer risk assessment process to determine the amount of capital allocated to that customer?

If built appropriately, it could be a desktop app the lender, branch, or call center employee could complete in front of the customer. See a sample of what I am talking about in the accompanying table.

Multiply this times every customer and every account and you would be able to calculate the capital required to support your balance sheet from the bottom up.

You can integrate ROE hurdles to feed pricing models in order to meet or exceed the hurdle. You can calculate customer profitability in terms of ROE, and create actionable customer tiers, giving platinum service to top tier, active cross-sell to middle tier, and efficient service to lower tier. And when regulators review your customer risk assessment process, and see that it is integrated into your pricing and profit models, capital plan, and strategic plan, trumpets will sound.

Sure, there will be challenges. I'm no compliance or risk expert so I'm not sure what other risk information should be collected on the customer. And what if Joe's year over year profit picture changes, or reality determines that Joe is bringing in bags of cash twice per week. A well designed system could send ticklers to the relationship officer to revisit the customer risk assessment based on the new information.

A disciplined, yet simple design that is integrated into your systems and processes could yield more accurate capital needs based on the sum total risk by each of the bank's customers. 

Do you think this is how it should be?

~ Jeff