Many organizations say that their greatest asset is their people. In fact, Richard Branson has famously stated that employees come first at Virgin, ranking ahead of customers and shareholders. So, how do businesses effectively manage this talent to drive success? This question is top of mind for many bank CEOs. As processes become increasingly automated and digitized, the composition of banking talent is changing – and banks will need to become adept at hitting a moving target.
Six Ways Banks are Becoming Talent-First
Today’s infographic comes from McKinsey & Company, and it explores six ways banks are becoming talent-first organizations:
- They understand future talent requirements. 43% of all bank working hours can be automated with current technologies. Consequently, talent requirements are shifting from basic cognitive skills to socio-emotional and technological skills. Banks will need to analyze where they have long-term gaps and develop a plan to close them.
- They identify critical roles and manage talent accordingly. It is estimated that just 50 key roles drive 80% of bank business value. Banks will need to identify these roles based on data rather than traditional hierarchy. In fact, 90% of critical talent is missed when organizations only focus at the top. Then, banks must match the best performers to these roles and actively manage their development.
- They adopt an agile business model. Banks will need to shift from a hierarchical structure to an agile one, where leadership enables networks of teams to achieve their missions. As opportunities come and go, teams are reallocated accordingly. This flexible structure has many potential benefits, including fewer product defects, lower costs, shorter time-to-market, increases in customer satisfaction, and a bump in employee engagement.
- They use data to make people decisions. Instead of making decisions based on subjective biases or customary practices, banks will need to rely on the power of data to:
Recruit Retain Motivate Promote
For example, company data can be used to develop a heatmap of the roles with the highest attrition rates. Leaders can then focus their retention efforts accordingly. 5. They focus on inclusion and diversity. Gender and ethnicity diversification leads to higher financial performance, better decision making, higher employee satisfaction, and an enhanced company image. Industry-leading banks will set measurable diversity goals, and re-evaluate all processes to expose unconscious biases. For example, one organization saw 15% more women pass resume screening when they automated the process. 6. They ensure the board is focused on talent. Only 5% of corporate directors believe they are effective at developing talent. To be successful, boards will need to recognize Human Resources (HR) as a strategic partner rather than as a primarily transactional function. The CEO, CFO, and CHRO (Chief Human Resources Officer) form a group of three that makes major decisions on human and financial capital allocation. CEOs worldwide see human capital as a top challenge, and yet they rank HR as only the eighth or ninth most important function in a business. Clearly, this is a disconnect that needs to be addressed. To keep up with rapid change, banks will need to bring HR to the forefront – or risk being left behind. on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
