Page 32 - Banking Finance April 2022

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The first driver is a defensive agenda which is about stopping due to inaction but due to an inability to take appropriate
bad things from happening as opposed to a progressive action. The best is example of Kodak, which went bankrupt
agenda which is about making things happen. (taken up on in 2012 in spite of being the innovator of digital camera,
Y axis) In terms of approach some organizations drive for and market leader.
resilience by driving for consistency opposed to having a
flexible agenda, which is having people that have variety of To avoid these traps of "Hubris- Inertia" an organization
different ideas, beliefs, outlooks, and practices which needs to develop an adaptive culture. An adaptive culture
enables them to be much more agile. (taken up on X axis) is made of a set of attitude and behaviors like learning from
past, being resourceful, adhering to best practices,
Now this creates four core quadrants, in the bottom left we integration within the organization, robustness, and
have preventive control which is about defensive agenda by rehearsing resilience. Rehearsing resilience is an everlasting
being very consistent, this is about putting defenses in depth process. It is more than recovery after the crisis it is
and stopping bad things from happening opposed to the persistence in the face of threat, changing before it became
bottom right quadrant that is mindful action , this is about a necessity.
having people who notice the problem, raise those concerns.
Those concerns are listened to and they are further powered Financial sector:
to act from further escalading. Like any other industry the financial sector has its highs and
lows. Incidents like the Barings Bank, Lehman brothers (also
In the progressive agenda which is mostly about making known as financial crisis) not only impacted the organization
things happen the top left bracket is about performance but had a contagion impact. The financial crisis of 2008 led
optimization; this is about the organization doing what it to the Basel Committee on Banking Supervision (BCBS)
does now but doing it better to drive competitive advantage. introducing Basel reforms.
Michael Porter gave following three types strategies to gain
competitive advantage: Cost leadership, Differentiation and The root causes of the crisis were excess liquidity, insufficient
Market segmentation. PepsiCo worked on cutting down its good quality capital, increased leverage, and lack of
operating costs to offer its products at a price lower as transparency. The financial institutions had to turn to their
compared to its competitors thus using the Cost leadership central banks for liquidity support and some to their
strategy to gain competitive advantage. Opposed to the government for capital injection.
performance optimization quadrant is the top right box
which is about being the disruption in the marketplace by BIS paper of June 2011 was published with a heading " Basel
being innovative and adapting to the situation. The fintechs III: A global framework for more resilient banks and banking
disruption has led to a shift from traditional banking systems" The reforms focused on improving quality of
methods of cash and credit cards to contactless transactions. regulatory capital , increasing the level of capital , specifying
Another classic example of disruptive innovation is Netflix minimum leverage ratio and introducing the concept of
which disrupted the existing market of the entertainment liquidity coverage ratio (LCR) and Net stable funding ratio (
industry. NSFR). The focus here was on building financial resilience.

Adaptation is a situation where you rise to the occasion even The supervisory role was also broadened with the
when your strategy may have failed. It is not easy to adapt, introduction of Supervisory Review and Evaluation Process
as it has its own traps, one of them being the success trap, (SREP). In the changed scenario non-financial risk also
where the organization sees the signals but ignores the became important as the supervisors and regulators focused
warnings. It is also termed as "Hubris", where organizations on assessing the risk culture, governance, and compliances.
tend to move into a comfort zone after attaining a particular The supervisory stance is stricter globally and financial
level. The other trap is the failure trap where there is a fear institutions have been fined for noncompliance, Not having
of failure because of incompetency in skill and tools. Due to a good risk management systems and Governance . The
these reasons the organization may fail or withdraw at a latest being the case of Citigroup being fined in October
premature stage. It is also known as "active inertia". Many 2020 for deficiencies in Risk Management and internal
thriving businesses tend to fail in the face of changes not controls.

32 | 2022 | APRIL | BANKING FINANCE