This is a moment of opportunity; the banking industry should seize it

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• Key Insight: A growth-focused Fed could unlock expansion and innovation for banks.
• What’s at Stake: Deposit share, talent wars and efficiency lapses could determine competitive survival.
• Forward Look: Banks should act thoughtfully but decisively, recognizing that this period of opportunity is real but unlikely to last indefinitely.

Source: Bullets generated by AI with editorial review

For banks, the next several years are critical and should not be squandered. Now that we know Kevin Warsh is the incoming chair of the Federal Reserve — barring any unforeseen confirmation complications — the odds are that we are entering a period of business- and growth-oriented financial services leadership. Chairman-to-be Warsh’s experienced views largely align with those of the three business-oriented bank regulators: Jonathan Gould, Michelle Bowman and Travis Hill. This is not to say that Chairman Powell was not also business-oriented. However, the current economic conditions, along with this administration’s financial leadership team, are focused on pushing economic growth as a primary priority and will work collegially, at least initially, to achieve that goal.

A few of the priority opportunities I see for banks at this time are the following, with a caveat I will mention below.

First, this is a great time to expand a bank’s best businesses, both in scope and scale. But as every banker knows, safe expansion requires top talent with their heads in the game 24/7. In this regard, in some parts of the U.S. there is already a tussle for talented lenders, exacerbated by private credit, and this competition will only intensify. However, it is cheaper in the long run to secure the right talent, as lenders often have the power, every day, to “bet the ranch.”

Expansion also means leaning into what a bank’s teams do particularly well, as well as exploiting the business’s natural adjacencies. Banks that get into trouble often do so by moving beyond their comfort zones and core expertise — beyond what their risk infrastructure can handle and what their banking teams truly know and understand. Too often, mistakes are made by following the herd into business directions that do not fit the bank’s knowledge base.

Banking is often at its best when it is boring and where the bank’s understanding of its own metrics — and those of the market — can keep pace with its business growth.

Second, efficiency opportunities should not be missed. Nothing flows to the bottom line more certainly or more quickly than expenses. Bank efficiency ratios have been one of the lodestars of good banking, particularly in good times when thoughtful regulators give banks leeway to cut excess. Many bankers believe that achieving an efficiency ratio of approximately 50% — or at a minimum under 55% — is essential for a well-run bank.

Others, however, point out that investing in the bank can temporarily push the ratio well above 50% and that it is better to invest in the institution than not. They correctly note that investments in future competitiveness will ultimately translate into a sounder, solidly profitable bank. This argument is especially compelling in an era like ours, driven by rapid technological change and one in which significant investments are required to ensure safety and soundness.

No one would argue against prudent investment in growth and innovation but that doesn’t mean it can’t be done within a framework of strong expense control. Investment notwithstanding, we should be wary of rationales for persistently weak efficiency ratios. Too often, they mask genuine opportunities to save money and redeploy it more effectively.

My own experience is that a well-executed efficiency effort is almost always a win-win. In that regard, a bank’s own employees are often the best sources of efficiency advice, provided the proper process is used to surface and curate that advice. Getting down in the weeds to distinguish waste from necessity takes time and effort, but done with care, it unlocks great opportunities.

Importantly, strong efficiency efforts should not be synonymous with weak controls. Certain roles must be filled, and investments in robust risk and compliance technology, particularly for larger institutions, are essential. But in control functions, as in the rest of the bank, the thoughtful use of every dollar can improve both control quality and cost discipline. In these areas, as elsewhere in the bank, more is not better; better is better.

Third, this is an ideal — and indeed essential — time for thoughtful innovation, both in the front and back offices. It is ideal in part because technology continues to advance rapidly, creating new opportunities to engage customers and new ways to safely increase efficiency and effectiveness in the back office. In this regard, the implications of these developments warrant deeper discussion, which I will address in next month’s column. For now, I will simply note that the financial services leadership within the government, referenced at the outset of this article, will, I believe, strongly support innovation in this area — and that successful utilization of new technologies depends on innovation being led by true subject-matter expertise.

Fourth, James Carville famously told then candidate Bill Clinton, “It’s the economy, stupid.” If Carville were advising a banker today, he would likely say, “It’s the deposits, stupid.” And, just like building a strong economy, it is far easier said than done. There are several steps that strike me as opportunities the banking industry too often underutilizes. One is more actively working through our trade associations to continually educate the public on the value of having FDIC-insured deposits. Other safe stores of value have their place but almost nothing matches the safety and liquidity of an insured bank deposit. Another is finding ways to embed deposit funding more deeply into modern payment systems and wealth-management mechanisms, ensuring that deposits remain central to how customers transact, save and invest.

Fifth, it is time to work with regulators — and, if necessary, Congress — to allow banks, not just holding companies, to make equity investments and to hold instruments such as out-of-the-money warrants, whether as part of loan structures or equity arrangements. Financing businesses today, including small businesses, is far more sophisticated than it was even a few years ago, and banks must be permitted to remain at the cutting edge of these financial innovations.

Finally, a caveat. We are living in incredibly volatile financial and geopolitical times. It bears emphasis that banks must maintain an anchor to windward on the one hand while keeping their eyes on the horizon for storms on the other. The financial underpinnings of today’s market can unravel quickly if the macroeconomic environment shifts. Should that occur, pressure on the current, more-accommodating regulatory team will likely increase rapidly. For that reason, banks should act thoughtfully but decisively, recognizing that this period of opportunity is real but unlikely to last indefinitely.