Chief executives of large financial institutions encounter a frequent barrage of criticism from shareholders, consumers, small businesses, Congress, and regulators.

Shareholders want higher and more reliable returns on their investments. Consumers want lower rates on loans and are sullen about the low rates paid on deposits. Still others want better access to community development loans and mortgages for people with low incomes. Small businesses believe banks have singled them out to deny credit access.

Congress, on the other hand, is sympathetic to small-business' concerns but reluctant to endorse any practice that will return the country to the free-wheeling banking it believes characterized the 1980s.

Tough Decisions

Regulatory authorities are caught between a history of ever-tightening regulatory scrutiny and a new administration that wants them to jump-start the economy with easier credit.

No wonder chief executives are hard-pressed to make the business and investment decisions that satisfy shareholders and also meet the expectations of their many constituencies.

Internal issues are equally disturbing for today's chief executives. The cost structures of many financial institutions are under unprecedented upward pressures.

Increasing deposit insurance premiums, intense regulation with its costs, necessary investments in technology and information systems, growing expense of employee benefits, and the need for more aggressive and consistent marketing expenditures just to stay even competitively, continue to erode the already declining profit margins of most financial institutions.

New Strategies

It is no surprise that today's performance leaders are fast becoming masters at cost cutting, expense control, and restructuring of operating practices.

Many have added merger integration skills to capture cost savings that come from operating scale and scope, and overall larger market positions.

In short, most financial institutions are searching for a new set of operating strategies that are efficient and effective, and will generate consistent high-quality earnings.

At the same time, most also must perfect product and business strategies that capture competitive advantage within a changing competitive and operating environment.

What Powers to Grant

Will these cost and business management actions be adequate to guarantee success and sustainable performance for the next five years? Will these leaner, meaner, and socially sensitive financial institutions be adequate to the competitive challenges of 1995 and beyond?

Few would say yes. No question, today's winners will be better managed as they move into the middle of the decade. At the same time, most chief executives believe new sources of revenue are needed to transform these financial services fighting machines into high-performing market competitors.

The capabilities needed to enhance competitive competence are well-known: broader line-of-business powers (e.g., insurance, underwriting, etc.); regulatory parity; community development responsibilities shared equitably among market players; harmonized capital and enforcement practices, and so forth.

Nonetheless, policymakers and their constituencies cannot agree on which powers will benefit the country and which will lead to further deterioration in the safety and soundness of the financial system.

Rigid Structure

Until the perspectives of shareholders, consumers, and policymakers come together, the future competitiveness of regulated institutions is locked into a rigid structure of products and operating capabilities that may well be inadequate to sustain competitiveness and shareholder value in the future.

Breaking this logjam of conflicting concerns and priorities remains a difficult, if not impossible, task.

At the core of the debate are two fundamental issues - how to monitor and manage risk across and all lines of businesses and all types of financial institutions effectively; and how to plan, organize, and manage operating capabilities in new ways that create sustainable strategic advantage.

Cross-Industry Perspective

These questions are not new. Most solutions fall short because they fail to consider systemic effects across the spectrum of firms that compose the financial services industry. Solutions that work for banks may add risk to insurance companies.

It is this cross-industry perspective on productivity and risk management that Wharton's newly expanded Financial Institutions Center intends to examine.

Recently, the Sloan Foundation made the Wharton School of the University of Pennsylvania a grant to study risk and productivity management questions across the financial services industry.

The center will focus on the practices and policies of the entire industry, not just banking or insurance.

Senior executives representing all areas of the financial services industry are working with the Wharton faculty to design a research agenda and evaluate results that reflect the complexity and interconnectedness of the industry.

Tapping Students

Wharton's center will hold research workshops with practitioners, researchers, and advisers to define the most critical research questions.

In addition, Wharton intends to tap into one of its deepest and strongest resources - its cadre of candidates for doctorates and master of business administration degrees - to conduct field studies and data gathering.

This approach not only taps a rich and a highly talented resource, but Wharton believes student involvement will change the way future generations think about the financial services industry.

Roadblocks to cross-industry studies are significant. Even when practitioners and accountants agree on the principles of measurement and reporting, the ability to measure consistently and over time is fraught with problems. Thus, a key research element will be issues of measurement and comparability

Information Center

To further support research efforts, the center will create an information repository for researchers about the data sources used to describe the industry, its practices, and its participants.

Just solving some of the measurement and comparability problems will help executives monitor and evaluate risk more effectively.

Productivity in financial services is equally challenging. Practitioners and consultants traditionally measure inputs and outputs. But researchers and labor economists do not agree on the measures of productivity in financial services.

How many units of consumer loans can be or should be sold on the platform? What are the appropriate relationship management benchmarks for the small-business market? What are the effects of technology on the effectiveness of the retail delivery system?

Studying Challenges

Researchers plan to combine field study of practices and procedures with evaluations of current theory and the evolution of new concepts to address these issues.

Researchers will examine a range of challenges: why some institutions are able to turn operating capabilities into strategic competencies; the long-term effects of outsourcing decisions; the application of technology to operating problems; the organization and management of delivery systems; how to set risk management dimensions on trading practices; the evolution of risk in complex risk management products such as derivatives, and others.

Often regulations treat the worst symptoms of a problem and then hope the remaining symptoms will be cured (or controlled) in the process.

While regulators, lawmakers, practitioners, and consultants focus on pragmatic answers for highly interdependent issues, it is not because they do not understand the multidimensional complexities of these issues.

On the contrary. The reasons for partial solutions are not surprising. With virtually every aspect of the financial services business changing, standing still is a certain formula for failure. Just staying even requires major restructuring in most aspects of every financial services business.

Broad Outlook Required

Finding sustainable answers that can transform a traditional financial services company into the broad-based institution chief executives envision requires a longer view and comprehensive approach.

Equally important, it requires partnerships between policymakers, researchers, and practitioners.

Serving the future competitiveness of the U.S. financial services industry demands new concepts, new perspectives, and the tools to make them work.

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