. Consider that you are the member of the management team of a large commercial
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Question
. Consider that you are the member of the management team of a large commercial bank that is publicly traded. Its performance is currently followed by numerous bank analysts (both buy and sell side analysts, so the bank could be “in play”). Upon reading the vast majority of recent analyst reports, you realize that the general consensus in recent analyst reports is that the bank must lower its efficiency ratio from the current 60% to less than 51% before the analysts will put a “strong buy recommendation” on the bank’s stock. If this doesn’t occur, the bank will be viewed by the market as a takeover target.
a. Provide several strategies that you would have the bank pursue to respond to these reports.
b. Provide the strengths and weaknesses of each strategy.
c. In your opinion, do equity analysts usually have a “reasonable” influence on bank management, or is their influence too great?
d. Discuss if you believe that management should focus on the operating risk ratio and what the likely impact of efforts to reduce this ratio will be.
Explanation / Answer
Strategic Management in Banking and Risk Management in Banking
t’s one of the major issues. Good corporate governance in banking is essential for effective banking strategies and risk management in both small and large institutions. And, during the 2008 crisis, there were certainly several high-profile failures of banking governance.The debate on governance shouldn’t be only about the boards of banks themselves. It should also be about the governance of banking supervision. I believe there should be a dual governance system based on clear objectives and accountability. On the one hand, the governance of banking supervision should insist on a clear objective (stability of the banking system) and accountability of supervisors. On the other hand, the governance of banks should concern itself with the maximization of the welfare of shareholders.
First of all, there are the external “stress tests”, which – especially now that they have been tightened up – offer non-executive directors important insights. Second, directors should be able to ask the right questions to distinguish between risk and uncertainty. In a situation of risk, the probability distribution of losses can be identified with relevant data. But in the case of a new product (such as subprime mortgages were) the distribution of losses cannot be measured, as no relevant data are available. This isn’t to say that bankers should necessarily avoid situations of uncertainty. As entrepreneurs they should look at new business opportunities. But cases of uncertainty should receive very special attention from the boards of banks and banking supervisors, and, at a minimum, the scale of exposure should be limited until more information on risk becomes available
d. 1. Improve the Digital Customer Experience
2. Enhance Data Analytics Capabilities
3.Reduce Operating Costs
4. Increase Investment in Innovation
5. Meet Regulatory and Compliance Requirements
6., Update or Replace Components of the Core Operating System
7.Recruit and Retrain Talent
8. Improve Business Processes
9. Enhance Security and Authentication
10. Partner With Fintech Providers
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