The economy is heading into a deflationary period that will require bankers to pay special attention to risk management techniques, says L.M. "Bud" Baker Jr., president and chief executive of Wachovia Corp.

"The changing environment for banking imposes risks in a way that harshly penalizes any failure to manage in a disciplined fashion," Mr. Baker said in a surprisingly cautionary keynote address at a risk management conference sponsored by American Banker.

"In today's world, any room we may have thought we had for error has probably slipped away." he said.

Mr. Baker made note of slow growth in the gross domestic product, deflation, the substitution of knowledge and technology for labor, and the globalization of the economy.

"These four factors provide a backdrop for an exciting, challenging financial environment," he said. "Growth will no longer take place within our backyard. Customers will be served by different media. New risks will be present in everything we do."

Mr. Baker said the low-growth economy has already sparked a shift away from loans and deposits, the historical bread and butter products of banks.

"The outlook for loans and deposits will be subdued," he said. Bankers will have to search for nontraditional funding sources, keeping an eye on market events' effect on the price of these instruments.

"In a slow-growth, deflationary environment good loans are hard to come by," he added. "To sustain performance, there is a temptation to slide out on the risk profile."

Indeed, Mr. Baker said, some banks may already be inadequately compensated for the lending risks they are taking.

New and revolutionary marketing skills, expensive and complex technology, and thoughtful and imaginative approaches and strategies are vital to keeping the "hearts and wallets" of bank customers, he said.

The challenge, he said, "is to grow in a moderately expanding economy, employ technology at every turn, have efficiency and effectiveness first on everyone's lips, and get sales without sacrificing service."

In a global economy, Mr. Baker pointed out, the financial system is no longer immune to a virus at some far corner of the world, and that requires bankers to keep abreast of foreign markets' doings.

Wachovia itself has been actively changing, Mr. Baker said at a shareholder meeting in April. "Branch standardization has facilitated the redeployment of about 700 positions, most of them more profitably in other consumer areas such as credit card, investment counselors, and telephone bankers," he said.

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