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Big banks' best defense in a pandemic: A diversified strategy

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Combined arms is a warfare strategy used by the military which seeks to integrate complementary assets in a common mission to achieve decisive effects.

It turns out a similar strategy is being used by big banks these days.

On the front lines, a good military (bank) wins when it effectively combines complementary assets as most militaries (banks) are dealing with the same basic commodities — in this case, money.

The bankers that win and gain market share are the ones that can best effectuate their strategy and work with different elements within and outside of the bank. It should also be said that no bank, or army for that matter, could have foreseen the deadly coronavirus pandemic given its velocity of transmission.

The nation’s biggest banks, however, will be better positioned to fight the pandemic than smaller banks. This is why knowing how to combine arms is paramount.

In banking, the knockout punch is leadership’s ability to navigate the ebbs and flows of “good” client relationships through business cycles: The troughs are asset-based lending and workouts, booms are commercial banking, then peaks are investment banking.

Thus, with the right relationships, the bank maximizes shareholder value by stretching the profit that can be generated through each customer relationship. In other words, the better assimilation with infantry, air support and special forces working in tandem and delivering a seamless customer experience, the lower likelihood of switch.

The battles take place in each region, around the country and leaders who win are decisive in their actions while understanding the elements to ultimately solve clients’ needs.

This is why senior bank executives need to use a military-style strategy when thinking about their own playbook. The similarities exist between financial services and armed forces with respect to command organizations that effectively decentralize decision making around objective-driven orders.

It’s all about the front-line ground game and technology — protect your markets and innovate. Large commercial banks and the military are both execution-based businesses that rely on large ground forces and market saturation. Moving forward, a great bank wins on tactics and technology but loses on systemic risk. In today’s market, that risk manifested as the coronavirus pandemic.

Think about the major money centers in America and how saturated they are with banks given the surrounding businesses and communities. Bankers form their strategies around these hubs.

Most banking and war strategies are still formed around basics of controlling land mass and deploying human capital. Banks are only as good as their market manager and battlefield commander.

Also similar to a military strategy, commercial banks take a city-by-city approach to establishing their positions, via retail banking to control deposits. Banks evaluate markets by cities or regions and need to deploy resources — people and capital — based on strategic importance. The bigger the market, the more strategic.

Usually the bank with air superiority (integrated asset-based lending capability) wins as it is a dimension that most banks don’t effectively use. It’s similar to how the U.S. Air Force initially started as a division of the Army to help serve and provide cover until time of separation into its own branch. Likewise, only recently in the history of banking has the asset-based loan product become a separate business within banks.

When asset-based lending was introduced, it was meant as a product within a bank rather than a separate business unit. Asset-based lenders within a bank have evolved to spend just as much time operating independently as they do covering their commercial banking footprint. Eventually, they branched out and charted their own course.

Special assets is probably the most recent addition to banks’ operational strategies. Taken together, commercial and industrial lending, asset-based lending and special assets creates a powerful triangle offense. It allows banks to onboard clients to commercial banking, transition to asset-based loans and then exit via special assets, if need be.

However, banks can’t rely solely on one group in times of economic distress. Additionally, due to the decentralized nature of banks, each region is covered by a different commercial and industrial lending “army,” and operates as its own silo similar to today’s U.S. military.

Each of the nation’s largest banks has an asset-based lending and special assets coverage group overseeing several of its commercial banking centers within each region. This is actually how banks are structured — smaller supporting groups providing coverage to the entire commercial banking group that controls most of the clients or assets.

However, the coronavirus pandemic changed the perspective in that it caused bankwide stress that asset-based loans and special assets were not in immediate position to cover for an entire bank, but rather key regions due to natural limitations. This will change fairly soon once the panicked market thaws.

Systemic risk like the current global pandemic will likely be incorporated into bank and military planning in the years to come. For right now, the banks that use the “combined arms” tactics should be best positioned.

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Asset-based lending Commercial banking Commercial lending Investment banking Coronavirus
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