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Transparency is a two-way affair

If we want customers to be candid, shouldn’t we do the same?

“There’s really not much that indicates we’ve learned anything new over the last several cycles,” says veteran lender and CEO Ed O’Leary. He aims to fix that. “There’s really not much that indicates we’ve learned anything new over the last several cycles,” says veteran lender and CEO Ed O’Leary. He aims to fix that.

I was reminded recently of the occasional issue that arises between banker and borrower—the issue of candor.

As a lender, I believe that I have an absolute right to know all the material unfavorable information about a borrower. How else are my colleagues and I to properly assess risk in a specific credit extension?

But if we value transparency, how much candor do we owe back to the borrower, our customer?

From the lender’s side

Many years ago I assisted my brother-in-law in identifying a decent used car buy from one of my customers. While my brother-in-law is skilled in his human relations job for a large industrial company, he is not (by his own admission and my personal observation) a financial maven. So I counseled him about reasonable terms and rates that he should expect to find in the marketplace for a car loan. In the course of divulging to me some personal financial information, I later learned that he had omitted a key fact or two. That bothered me, as I had introduced him to my own bank for his car loan.

I subsequently confronted him on that point.

“Well, you don’t tell your banker everything, do you?” he responded.

“Hell yes, you do,” was my own response, “though perhaps not your brother-in-law.”

There are two important and unrelated points to this anecdote.

First, don’t do business with family members.

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Second, bankers need full disclosure to do their jobs properly, considering the best interests of our employers.

From the customer’s side

But here’s a thought for what may be our industry’s (or our particular bank’s) situation in more mature phases of the current business/interest rate cycle. What sorts of disclosures do we owe our customers, if any? Can you imagine that an ethical obligation might arise for us to share specific information about our employers to our borrowing customers?   Is so, what might that be?

What if you or I sense a growing concern within our banks to, say, a concentration that has been detected within our loan portfolio?

What if that concentration were to prospectively make it more difficult for us to handle the borrower’s business in terms of responding to his or her business needs of an otherwise credit worthy borrower?

I was in that situation once and felt it my duty to have a candid conversation with a potentially impacted borrower. So I disclosed my concerns to my customer, who greatly appreciated my candor, as did I his discretion. The instant situation turned out well in the long run. But my customer never forgot my sharing this concern with him and greatly appreciated my having done so.

Situations such as these may seem remote and even far-fetched to some. But I’m increasingly concerned in recent years and the spate of bad publicity impacting banks may be putting the Character C of lending under the microscope in a different way. There have been numerous instances of aberrant behavior of bankers that have made front-page news in recent years. And there’s no reason to doubt that customers look to each of us to be persons of character as we habitually do of them for the same personal trait.

Three years ago, in his then capacity of Federal Reserve governor and “point man” on the issues of banking supervision within the Federal Reserve System, Daniel Tarullo candidly warned that the cumulative effects of Reputation Risk afflicting the banking industry were beginning to resemble a safety and soundness issue.

That puts the Character issue squarely on the table between us and our borrowers. This may give rise to a responsibility of candor and truthfulness to them in matters where actions within our banks may have unfavorable consequences on their businesses.

From the regulators’ side

There’s no point here to parse all the various ways that such situations may arise nor is there necessarily a ready template for our use in resolving them. My reason for raising this issue at all is the possibility that supervisory agencies may deem some banks that have been under corrective orders for a variety of issues in recent years to have failed to satisfactorily correct those issues.

There was one such example in the news in recent days involving Citibank. The Comptroller of the Currency determined that the bank has failed to take sufficient corrective action on some Bank Secrecy Act matters.

This instance is not of the nature of my concern but indicates that some actions previously deemed to be “resolved” may not be at all. We may as an industry have to revisit some older issues and more negative impacts on us in the public relations sense—and in the reputation risk sense as well—may be imminent.

The individual banker’s view

What’s so potentially discouraging is how difficult it is to put some of these issues truly behind us. And this keeps tearing the scab away from our so many of our industry’s wounds.

It hardly falls to us as individuals to correct such systemic matters. But it’s within the rights and expectations of our employers and our customers that we not exacerbate or contribute to them in any of our personal actions.

In a way, the cure for much of our current issues of Character as bankers is similar to dealing with conflicts of interest. Sunshine and disclosure are often the most effective antidotes.

That’s a matter for each of us to address in very personal ways as we go about our business. We have the moral obligation to protect our employers from further reputation risk exposures and to do that, we have to act in accordance with the highest ethical principals.

These thoughts on character and how we deal with such issues remind me of the phrase I recall from my grandparents’ time: “Sauce for the goose is sauce for the gander.” Character runs both ways.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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