Information - Getting the Right Balance Between Detail and Forecasting.
This is especially true when it comes to management providing information to the board of directors. Some financial institutions tend to provide all of the details to the board: Who is borrowing money, why are they borrowing, who is depositing money, who has been hired and fired, etc. The challenge with this approach is that it is easy to get drawn in by the details and lose sight of the trends and exposures your bank is facing. Others present information in a fragmented way, making it difficult to compare things like asset liability management to loan losses. And still others take the approach of not enough information, especially in the area of forecasting, trends and concentrations.
During strong economic times, this is not often an issue. And so decisions like changing the bank’s loan-to-value ratio or loan-to-deposit ratio are made without a thorough exploration of the down side to these changes. It is during times like we are experiencing now that these deficiencies come back to bear and, as we have seen, can lead to bank failure.
Building a Dashboard
Now is the time to revisit this flow of information and ensure the right information is flowing up with the right details. And while these details can, and should, vary from bank to bank, there are key items that should be put in place.
The Board’s Dashboard should at a minimum:
- Be consistent in the presentation of information. Risks are measured differently and need to be brought into a consistent and well understood form
- Provide trending graphs, both historical and projected. Five years back and two years forward are good starting points.
- Provide management commentary from each of the key areas (lending, finance, ALCO, etc.).
- Have a set of key metrics that can identify economic (systemic) changes.
- Have a set of key metrics (employee turnover, volume changes, trending losses, etc.) that can identify risks specific to the bank.
- Include worse case scenarios and the projected impact on the bank. This area in particular could be supported by a documented table top walkthrough by bank management.
- Provide a periodic external view of the risk profile of the bank.
- Show changes in portfolios that may migrate slowly over time. Combining parameters with these migration trends can force actions and decisions to be made.
- Have minutes from the various board committees in a consistent format, including the capture of some discussion.
- Include any regulatory mandated information.
Some directors have told me they like and need the detailed information. Having been associated with this bank for a long time, they know what they want to look at. In this case, I recommend the bank create a reading room where all of the detailed information is stored. That way, a board member can have access to the information on their schedule and spend as much time as they want going over it.
Why change now?
The current economic crisis and the sheer number of bank failures in 2008 and 2009 show that there is a strong need to revisit the information received by the board of directors. Too much of the information is historical in nature, too focused on individual loans and other events, and often fragmented in its presentation. The property bubble and the sub-prime issues did not suddenly surface overnight, although it may appear that way to some. And, to be blunt, the banks that saw the future and took steps to mitigate their risks are the one that are surviving and thriving right now.
As we climb out of this economy and prepare for the next growth phase, it is all too easy to bury the unpleasantries of the recent past. Use this time to beef up the information presented to the board. By creating a strong and consistent dashboard, the direction the bank is heading in becomes much more clear. And the icebergs that threaten are made visible and can be steered around, making the journey both predictive and profitable.