The recent collapse of First Republic Bank is another example highlighting the importance for business leaders to be uber-predictive and ongoing practitioners of risk management. This process should be embedded into their operations to protect their brand, valuation, and customers.
The seeds of First Republic’s failure were sown years ago when their strategy was developed to focus on wealthy clients by offering rock-bottom interest-only jumbo mortgages as a key means to get those clients to accumulate assets in the bank. Due to widespread banking industry concerns, First Republic Bank needed cash to cover clients withdrawing their money from the bank. Their mortgage loans were of little value to generate cash in the current higher interest rate marketplace.
If First Republic Bank was thinking about risk management as part of its ongoing practices, its leadership would have considered how to deal with future rising interest rate risks. Taking a longer-term view of possible future financial market scenarios may have helped guide them to a better-informed strategy and avoid this collapse. Sadly, the effects of the First Republic Bank’s failure impact many….employees losing their jobs, shareholders losing their investment, and senior leaders losing their positions – everyone’s reputation is impacted. Their reputational piggy bank is now sustaining many withdrawals.
Risks for businesses come from many different sources – financial, legal, environmental, operational, and reputational are just some major areas to consider. A sound business management process for leaders is routinely conducting risk assessments while considering the possible scenarios in a fluid marketplace. This is one of the key roles of leaders….to understand possible business risks and take actions to manage those risks appropriately to ensure the longevity and valuation of the enterprise. This way, banks can turn short-term adversity into a long-term marketplace advantage.