Nearly every financial institution is undertaking a comprehensive reevaluation of methods and processes for measuring and managing asset portfolio risk.
But what about customer risk?
This came to mind recently when reading an interview with Wells Fargo's CEO, John Stumpf, in Investors Business Daily. IBD chose Stumpf as their CEO of the year because he had the foresight to keep WFC away from the most toxic forms of mortgage assets, sacrificing considerable profits in the short term but keeping the bank out of trouble in the long term. WFC may be down 33% from Jan 1, 2008, but that's a far cry better than the 60%+ drop in value for the banking sector as a whole.
I noticed in the interview a story we've been hearing from Wells for years -- an emphasis on cross selling and signs of higher-than-average retention experience in their customer base.
Most banks strive to do better on the cross-sell and retention fronts, so there's nothing entirely new there (except that few still are very good at it). But I wonder how many are seeing the analogies between risk in the asset portfolio and risk in the customer portfolio. It's a basic lesson from investment theory that there's an efficient frontier on which trading off asset risk against return is optimal. Asset portfolio management is based on that simple concept, even if there have been some monumental miscalculations of asset risk.
How many banks could actually plot their customers on a risk vs. return matrix and see how many lie on the efficient frontier? While some of our clients are beginning to think this way, none are yet at the point where they can do this.
We don't know if Wells explicitly manages customer investments this way, but they clearly do implicitly. And that discipline will continue to yield results after we've put the asset mess behind us.
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