Kentucky Banker Magazine - Summer 2020

Page 24

Lessons from the Great Recession by Chad Hull, Charlie Crowley and Chris Chapman Managing Directors, Investment Banking Boenning & Scattergood, Inc. It happened so fast! One day, we had record low unemployment rates and very strong measures of banking industry health compared to historical averages (record earnings, strong capital levels and superb asset quality metrics). In a flash, large segments of the economy were shut down by the scary presence of an invisible enemy that upended the way we had always worked, learned and played. In addition to the stress related to health and safety concerns, there are widespread concerns about unemployment and whether businesses, large and small, will be able to survive. The nation’s bankers, as always, have been on the front lines in helping to ensure that businesses and consumers can still function and keep our economy alive. Many industry observers thought that the Great Recession of 2008-2009 was no more than a once-in-a-generation phenomenon in terms of severity. Unfortunately, bank leaders today need to dust off the playbook and examine what they and others did right and wrong, navigating their way through the Great Recession and rebuilding their businesses in the challenging years afterwards. Of course, there are significant differences between the Great Recession and the COVID-19 crash. The Great Recession was triggered by a variety of factors, including steps by Congress, Freddie Mac, Fannie Mae and rating agencies to create a more highly leveraged mortgage finance system, with nothing-down loans and cash-out refinance deals that, in hindsight, were very unwise. Mostly, the problems that ensued were the result of a cracking of the widely held, multi-generational view that housing (if not most forms of real estate) would always hold its value, thereby allowing for a high degree of leverage. Some of the Wall Street banks were facilitators of ill-conceived derivative products and securitizations, and certain Wall Street firms themselves were overly leveraged and unable to handle the liquidity squeeze that resulted from the credit crisis. Because of the many complex issues leading to the housing bubble and the Great Recession, most people (in D.C. and on Main Street) did not have a good understanding of the facts and tended to incorrectly blame banks as being the source of the economy’s problems. Although the government’s investments in banks under the TARP program actually generated a positive return, the banking industry was tarnished by having received expensive government “bailouts.” 24 | KENTUCKY BANKER

This time is different. Banks certainly did not cause the coronavirus problems, and the government was largely responsible for putting the economy into a medically induced coma in order to prioritize the safety of our citizens. The hope is that the public health issues can be controlled well enough to allow the economy to bounce back from this recession relatively quickly and decisively, as opposed to struggling through a protracted and uneven recovery, potentially requiring dramatically more governmental and taxpayer assistance than has already been supplied. Only time will tell, but the nation has never been through an immediate economic deep freeze like this. Like the Great Recession, this period obviously creates a tremendous amount of uncertainty for banks. Unlike the Great Recession, however, the media’s portrayal of banks’ involvement is trending more favorably today. Hopefully, the majority of people will realize that banks are working with customers and the SBA to help keep businesses and households afloat economically. Nevertheless, challenges abound. Stock prices have already been hit hard, as investors brace for darker days ahead. Loan losses for the industry are widely expected to increase, with the result that earnings are likely to be down and capital is likely to be stretched at least to a certain degree (though industry capital levels were dramatically higher this year than at the outset of the Great Recession). In challenging times like these, bank leaders will certainly be under pressure and will be presented with great opportunities to shine. In most cases, we believe that the lessons learned from the Great Recession will help the nation’s bankers today. Reflecting on our own practice of advising community banks, we have been fortunate to have worked with many outstanding banks and bankers over the years, through good environments and challenging ones. With that experience in mind, we offer the following suggestions from observing successful clients as they worked through the Great Recession and its aftermath: Maintain focus on ALL of your stakeholders. The best bank leaders instill in their organizations a culture of serving several constituencies – employees, customers, shareholders and regulators – recognizing that the stakeholders are interconnected. A bank that takes good care of its employees will find that its employees provide excellent service to its customers. Regular and open communication with regulators is necessary to keep them continued on page 26


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