The Great Depression of the 1930s triggered the failure of 9,000 financial institutions in the U.S. Despite draconian measures passed by Congress in 1932 and 1933, less than 60 years later, another 3,000 U.S. financial institutions failed during the banking crisis of the late 1980s and early 1990s.
Since the beginning of 2008, the Federal Deposit Insurance Corp. reports 457 bank failures. My data and analysis of basic retail and commercial banking—the kind of banking practiced by 99.7% of America's banks — show a high correlation between bank failure and the entry of new competitors into markets. Specifically, the likelihood of failure rises significantly when new banks are chartered and led by inexperienced directors and so-called bankers. In addition, industry profitability appears to be highly correlated to new bank formation rates. Not only are the new chartered banks at risk of failure, but existing banks in the market are put at significantly higher risk as well.
No bank is an island. Good banks and bad ones drink from the same community well. Let a bad banker poison the well, and good banks suffer, too. Whether a bank wants to sell tomorrow or is built to last, all bankers and directors have to protect the water supply. History has proven that bankers cannot rely on nonbankers to do so.
More often than not, failed or problem banks lack experienced, skilled directors and management. There are a finite number of talented people capable of running and overseeing America's banks. Skilled bankers and directors are trained to know which processes — such as how to evaluate and effectively document a loan request — are critical to success. Over the past 20 years, the industry has cut back on the kind of training needed to develop general bankers. Consequently, the talent issue in banking is worse today than it has been in a very long time.
Unlike just about any other profession, the banking industry lacks a definition of minimum standards of ethics, skills and experience needed to be a banker. No schooling is required. No training is needed. All one has to do is work at a bank. To say one is a banker because he or she works at a bank is like saying you are a car because you live in a garage. The term banker must mean something.
By establishing standards, the banking industry can block corrupt, incompetent and unskilled bankers from entry into the business. As the data about bank failures show, bad bankers make banking bad for everyone. Good bankers should push for the industry to have the highest ethical and professional standards. By doing so, they not only help society, they protect themselves.
Leading bankers and directors should promptly engage the Risk Management Association, American Bankers Association and Consumer Bankers Association in an unprecedented effort to define standards for testing and certifying bankers in risk-taking and risk-protecting roles. Similar expectations need to be established for bank directors. And like other professions, the banking community must put in place annual continuing education requirements.
The banking industry can learn from other professions. The American Academy of Actuaries may be the best model for the banking community to study. Independent of the U.S. government, but cooperative, the Academy sets and controls the standards for the actuarial profession. Importantly, the Academy has the power to expel, suspend and publicly reprimand members. Banking needs self-policing powers.
For good reason, bankers today are in the penalty box. Getting out will take time, disciplined management processes, unswerving evidence of integrity and a commitment to balancing competing interests. Can bankers do anything to accelerate the industry's exit from the penalty box? Yes, but it requires bankers to think differently about professional standards for their industry. Banking should require industry-wide standards for anyone who is a banker or director.
Richard J. Parsons spent 31 years in banking. He now writes about the industry. His book, "Broke: America's Banking System,"will be published by The Risk Management Association in spring 2013.