Steve Cusato is senior vice president and manager of City National Bank's San Diego Commercial Banking Services.
How has the financial crisis reshaped the banking industry? What are the new requirements for successful banking leadership?
In the past decade, the U.S. economy grew on a toxic brew of easy credit, inflated values, disproportionate credit risk, inadequate regulation and excessive optimism. What we're seeing now is an industry-wide return to the time-honored basics of banking: traditional financial management, a solid capital structure, sound credit and risk management practices, and strong client relationships.
Traditional financial management applies as much to consumers and businesses as it does to banks. Given the current recession, many borrowers have become more careful about assuming additional debt. In fact, many of them are aggressively paying down debt.
Banks are in business to lend, but they also have to manage risk and safeguard credit quality. What the industry can't afford is to make the same mistakes that caused a number of major financial institutions to fail in the last two years.
Right now, the industry as a whole is crossing what I'd call "white water." Some banks already have been swept away by the tremendous change we've seen. Others will lose their footing in the months ahead. But the overwhelming majority of America's 8,300 banks are strong, and they will make it through.
The successful banks are the ones that stick to the basics, and that means serving clients well and understanding what they need from a bank. City National has built its reputation on relationships. Our clients know that we understand them. If it's a business client, for example, they know that we understand their business and their industry as well as their strategic and financial objectives. We earn their trust by proving that our advice and the quality of our products and services are helping them succeed. The same holds true for our small business and investment clients.
What do you see banks doing/continuing to do to maintain profitability and manage costs during the downturn?
As the economy slid into recession, I think most organizations -- not just banks -- adopted the strategy of hoping for the best and planning for the worst. Given the economic doldrums in which we seem to be stuck, that approach appears prescient.
The strategy for maintaining bank profitability goes back to two of the fundamentals I mentioned earlier: capital and credit quality.
Capital is king. It's fundamental to everything a bank does: providing credit to consumers and businesses, ensuring the safety and soundness of their deposits, and expanding its capabilities to better serve customers.
Credit quality must remain job No. 1. It starts with staying close to our clients, with understanding their businesses, their financial needs and especially their challenges. Bankers don't like surprises. If a client has kept us up-to-date about changes in the financial condition of their business, the greater the likelihood of a successful solution.
In terms of managing costs, it's not been a year for "business as usual" for any business. It's a year for difficult decisions and even tougher choices.
Banks, like any other business, are aggressively managing their expenses. Some have frozen or reduced salaries and positions or, in some cases, eliminated bonuses and prudently reduced shareholder dividends based on earnings.
On top of that, the industry is being pressured by higher credit costs, historically low interest rates and FDIC premiums that have increased exponentially.
Even so, banks cannot afford to wait for an economic turnaround before developing new products, services and capabilities that will meet the evolving needs of their clients. At City National, for example, some of those initiatives include strategically expanding our branch network, introducing new cash management and online banking services, establishing a new line of business to serve affluent clients, and selectively recruiting some of the industry's top talent.
What other trends do you see emerging in the banking industry? Is there anything in particular that consumers should keep an eye on?
Any consumer or business using a bank should understand that, because of shifts in the economic and regulatory environment, the dynamics of how banks do business are changing.
Banks that have been acquired by a larger institution, for example, may undergo a sea change in how they relate with their clients. Organizations grappling with capital problems are going to have a hard time entertaining new loan requests. Banks that are safe and sound still can limit lending if they've reached their portfolio thresholds for certain industries -- it's simply a smart way to run a bank.
What this means is that clients have to proactively manage their banking relationships and start asking the tough questions:
¥ Is my bank financially sound and well-managed enough to be with me for the long-term?
¥ Has it maintained the same fundamental approach in how it meets my financial needs?
¥ Does it have the ability to offer the advice, products and service that can meet those needs even as they change?
The bottom line is to choose your banker as carefully as you would a personal attorney, an accountant or CPA, or an investment adviser. Make sure that relationship continues to work for you.
-- Compiled by Rebecca Go