Print ArticleThoughtful Strategic Planning in Periods of Economic Uncertainty
by Andrew Giltner, Lead Examiner, Supervision and Regulation, Federal Reserve Bank of Chicago, and Dane Scofield, Examiner, Supervision, Regulation, and Credit, Federal Reserve Bank of Minneapolis
The boards of directors and senior management of community banks should approach strategic planning in times of uncertainty by embracing changing economic conditions to identify opportunities for long-lasting growth. With the myriad challenges in today’s economy, it is more important than ever to have confidence in strategic planning practices. Strategic planning facilitates deliberation and collaboration among boards and bank management by establishing and reinforcing key goals to achieve future success. A community bank’s board and senior management can more confidently prepare for the future by focusing on strategic planning fundamentals. This includes applying a resolute core mission and vision statement, performing appropriate due diligence, clearly outlining the bank’s strategic plan, and routinely monitoring and updating the plan as conditions change.
Unwavering Core Vision, Mission, and Values
An effective strategic plan reflects the values and culture of a bank through its mission and vision statement, describes long-term goals and objectives, and measures the success of those goals and objectives. Establishing an uncompromising mission statement of what a bank is currently achieving and a clear vision of what the bank wants to achieve in the future is critical to its long-term viability and success. The importance of strategic planning is universally recognized by bank boards of directors and senior management, as referenced in survey results from the Bank Director’s 2021 Governance Best Practices Survey.1 Of 12 total choices presented to the respondents, holding senior management accountable for achieving strategic goals in a safe and sound manner was ranked the most important function of a bank’s board, and setting the bank’s strategy was ranked the third most important.
While strategic planning requires a nimble approach in times of uncertainty, the foundations of sound strategic planning largely remain the same. A bank’s senior management should, in consultation with the bank’s board and business line managers, develop a strategic planning process that results in a board-approved, written strategic plan that typically spans three to five years.2 In times of uncertainty, some banks shorten the time horizon to three years or less. Regardless of the time horizon, the strategic plan should align with the board’s risk appetite, capital plan, and liquidity requirements, and it should carefully consider the available managerial and financial resources needed to reach the bank’s goals and objectives.
The strategic plan should be dynamic and adjusted to reflect current conditions by a bank’s board and senior management. For example, many community banks temporarily closed their branch offices during the COVID-19 pandemic to keep staff and customers safe. This sudden shift increased the adoption of new, or previously underutilized, online banking services, such as mobile banking, remote deposit capture, and electronic bill payment. Although adjustments to the planning process can create challenges for the board and senior management, it is important to remember that a bank’s core values should not change in times of uncertainty.
Know Your Bank, Your Market, and Your People
Although there is no one right way to conduct strategic planning, the bank’s board of directors and senior management should assess both internal and external factors impacting the current operating environment, as well as the bank’s financial condition, risk exposure, business model, and key opportunities and challenges.3 This is often accomplished through a SWOT analysis,4 a competitor analysis, or a scenario analysis, or a combination thereof. Before the initial planning session, high-level data on the banking industry, market outlook, and macroeconomic trends should be assembled and evaluated by senior management.
Having the board and senior management reach a consensus on key success measures is a good starting point. A bank’s business unit leaders should also develop specific objectives, opportunities, and needs for their respective areas of responsibility, and the board and senior management should reconcile this information with the strategic plan. Seeking feedback from business unit leaders is essential to developing strong bank talent and identifying the current and future staff resources necessary to achieve strategic objectives. Oversight by senior management is crucial to ensure that business units are working together and meeting the objectives of the entire organization.
For banks that are exploring new digital innovation products or services for their customers, it is important to design an effective risk management system that includes adequate due diligence; policies, procedures, and controls; and performance and monitoring metrics. The risk management system should be implemented before engaging in new products and services and evolve to keep pace with additional complexities and technological advancements. To provide further information for community banks about performing due diligence, in 2021, the Board of Governors of the Federal Reserve System, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, issued interagency guidance regarding the management of risks involved in relationships with financial technology (fintech) companies.5
Create a Living Strategic Plan
The sophistication of strategic planning practices and the granularity of strategic plans will differ based on the size of the bank and the complexity of its operations, as well as the risk appetite of the board of directors. To ensure success, the strategic plan should:6
- establish the bank's risk philosophy, including both the aggregate level of risk and the tolerance for risk;
- ensure that the bank has an appropriate risk management framework to manage and mitigate risk;
- set the bank on the right course by determining the overall business strategy; and
- monitor the implementation of the strategy to ensure that strategic objectives are being accomplished within the parameters of the established risk management framework.
A relatively small and noncomplex bank with a tenured and stable executive management team might perform more straightforward planning. Conversely, larger and more complex banks with higher risk tolerance should implement more comprehensive strategic planning practices. Strategies that pose a higher risk require greater pools of capital and reserves, sustainable income, and board and management expertise in these more complex initiatives. For example, a bank with a significant commercial real estate concentration should explain in its strategic plan the rationale for having such a concentration relative to capital levels and overall growth targets. Bankers need to understand their own bank’s risk profile, including risk exposure to adverse credit scenarios, deposit concentrations, asset-liability mismatches, declining investment values, and rising interest rates. Ultimately, a bank’s board of directors is responsible for making sure that the bank implements a strategy that is consistent with its risk philosophy and risk management framework using sufficient expertise and resources.7
Continually Measure the Plan’s Progress
Once a bank’s board of directors approves its strategic plan, it is important for management to define and measure progress in implementing the plan. Assigning responsibility for strategy implementation and establishing a target timeline for completion are two important steps for creating accountability. Senior management should create metrics and regularly monitor the progress of key strategic initiatives. The board and senior management should also remain flexible, reevaluating the priority of objectives that are related to changing environmental factors and making adjustments as needed. For instance, the presentation of periodic progress reports to the board is an effective way to accomplish this task.
Bank leaders should also monitor and adequately assess new, expanded, or modified products and services to determine their impact on the bank’s risk profile. Senior management should carefully evaluate underperforming projects and discontinue them if they are no longer aligned with the bank’s risk appetite or strategic direction.
Conclusion
Strategic planning is the cornerstone of an effective risk management framework; without it, the risk of adverse consequences is elevated. Community banks have faced great challenges in the recent past, and they continue to demonstrate their financial resilience and their commitment to serving their customers and communities. Boards of directors and senior management will need to remain flexible and innovative in the future to face increasingly difficult market conditions.
During a bank’s strategic planning phase, the board and senior management should remain focused on the bank’s core mission, vision, and values, and they should also be aware of when the plan needs adjustments. They should have a clear understanding of the institution’s current risk profile, conduct effective due diligence, and allocate the proper resources before expanding into new lines of business. Finally, they should maintain an objective, frequent, and well-informed follow-up process to ensure that strategic objectives are executed in alignment with the bank’s established risk management framework. Successful strategic planning is a continual exercise, and its true value lies as much in an effective planning process as it does in the bank’s ultimate strategic plan.
- 1 The survey is available at www.bankdirector.com/wp-content/uploads/Governance-2021-Report.pdf.
- 2 See the Office of the Comptroller of the Currency’s Comptroller’s Handbook: Corporate and Risk Governance, version 2.0, July 2019, available at www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/corporate-risk-governance/pub-ch-corporate-risk.pdf.
- 3 See “Strategic Planning in an Evolving Earnings Environment,” Supervisory Insights, Summer 2015, available at www.fdic.gov/regulations/examinations/supervisory/insights/sisum15/sisummer15-article1.pdf.
- 4 A SWOT analysis is a compilation of an organization’s strengths (“S”), weaknesses (“W”), opportunities (“O”), and threats (“T”).
- 5 See Supervision and Regulation (SR) letter 21-15/Consumer Affairs (CA) letter 21-11, “Guide for Community Banking Organizations Conducting Due Diligence on Financial Technology Companies,” available at www.federalreserve.gov/supervisionreg/srletters/sr2115.htm.
- 6 See Kevin Moore, “The Importance of Effective Corporate Governance,” Community Banking Connections, Fourth Quarter 2012, available at www.cbcfrs.org/articles/2012/Q4/Importance-of-Effective-Corporate-Governance.
- 7 See Kevin Moore, “The Importance of Effective Corporate Governance.”