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Ideas for Leaders #126

Community Banks Offer a Better Business Logic

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Key Concept

What can large institutions learn from smaller enterprises such as community banks? According to this Idea, reconnecting with communities in vital and lasting ways is an essential lesson — offering a logic that is the opposite to the ‘financial’ logic that has driven many organizations into difficulties. By reviewing the logic that drives your firm, damaging consequences in the future could be avoided. 

Idea Summary

Every organization is driven by some sort of institutional logic (i.e. ‘belief systems’ that define what is or is not accepted as legitimate behaviour). It is this logic that shapes individual identities and the organization’s mission as a whole. For example, start-ups work on a fast-growth, entrepreneurial logic; banks, on the other hand, are driven by financial logic. In fact, the latter is not unique to just banks; it is the core element of most market-based systems focusing on maximizing profits and shareholder returns.

Economic crises of not too long ago are evidence that financial logic taken to the extreme can eventually lead to damaging consequences. So, as institutions try to redeem themselves in the wake of recent scandals and recover from recession, what lessons can they implement to create a new kind of logic to avoid going through the same again?

IESE Business School’s Juan Almandoz thinks that ‘community institutional logic’ might be the answer — strong, affective and enduring ties among members of small, bounded groups (such as banks). Focusing on the US, his research suggests that smaller, community banks may be less risky than their larger counterparts, particularly during a crisis. One of the reasons why is because community banks tend to steer clear of riskier financial products, such as subprime mortgages or securitized debt obligations.

Crucially, community banks retain their connection to a sense of a higher mission, something absent in financial logic which puts money-making ahead of other considerations, like how the organization is serving communities and clients. Though they do of course incorporate financial logic too, social concerns are more important.

Acknowledging that regulatory failures have obviously also played their part in recent crises, Almandoz proposes that an ‘unfettered’ financial logic may actually have been the deeper cause. 

Business Application

Almandoz stresses that the key areas on which the success of community banking depends are the same for all kinds of companies. As such, the following may be broadly applicable:

  1. Choose your mission wisely: make sure there is a broad enough client base for the type of business proposition you are offering.
  2. Gain approval: this could be regulatory or otherwise. In this post-crisis environment, appreciate that even after passing all regulatory hurdles your behaviour will be governed and scrutinized by your local community, upon whose support your existence ultimately depends.
  3. Select your team with care and know their motives: attract team members from both financial and community backgrounds.
  4. Focus on stability: understand the trade-offs between rapid growth and liquidity risk. Greater stability comes from a stable, long-term deposit base.
  5. Remain faithful to your values: stay the course and remain true to the ideals that give community banks a competitive advantage over larger institutions, such as credibility.
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Authors

Institutions

Source

Idea conceived

  • 2013

Idea posted

  • April 2013

DOI number

10.13007/126

Subject

Real Time Analytics