The recent wave of enforcement actions and tough exams has familiarized a growing number of bankers with an increasingly important supervisory tool — the strategic plan. A large fraction of the roughly 1,100 enforcement actions initiated in 2009 required the bank to submit a strategic plan. Requests for strategic plans are also increasingly common in informal enforcement actions and other supervisory situations.
Banks should approach a strategic-plan request as a challenge to current practices, rather than a mere formality. Such a request implies at least some doubt that the bank's current course is viable. Failure to respond to these doubts typically compounds a bank's troubles. It also squanders an opportunity to make the case for management's ability to steer the bank through the storm.
When we help banks prepare strategic plans, we often encounter misperceptions about their purpose and importance. Many banks don't take strategic-plan requests seriously enough. Others don't know how to make their strategic plan work for them rather than against them. Here are a few tips for avoiding the pitfalls that trip up others:
- Avoid a defensive or self-congratulatory tone. Accept responsibility for shortcomings and express a genuine commitment to improvement. By showing some contrition, the bank can begin to rebuild trust with the supervisor.
- Avoid excessive optimism. Financial projections should be positive, but they must also be credible and leave a reasonable margin for error. Failure to meet self-imposed benchmarks requires explanation and may raise additional concerns. Exceeding expectations does not.
- Address in detail the specific issues that worry the supervisors. Explain in concrete terms, and with specific timetables, how the bank will accomplish what might seem challenging to a skeptical reviewer. Make sure this plan is consistent with current supervisory policy and avoids regulatory hot buttons.
- Avoid excessive detail on topics that are not at issue. Yielding to the temptation to emphasize what works risks distracting readers from the main message. It can also unnecessarily create self-imposed benchmarks the bank then has to meet.
- Ensure the strategic plan is consistent with all the other documents the bank is submitting. Ideally, all submissions should be tied together with common themes and speak to the bank's broader strategy for addressing its supervisors' concerns.
- Follow through. After submission, adhere to the strategy absent material changes in the bank's operating environment. Board involvement in the plan's implementation is critical. A readiness to discuss developments with supervisors and make adjustments based on supervisory input also goes a long way.
As strategic plans grow in importance as a supervisory tool, they deserve increasing levels of care and attention from bank management and boards. Getting a strategic plan wrong can lead to escalating enforcement actions and continued erosion of the supervisory relationship. Getting it right can help resolve regulatory troubles and give the bank a fresh start.
