Our Failed Financial Institutions Need to Meet Their Community Covenant
We dodged a bullet. The global economic meltdown, which saw 140 banking organizations closed in the U.S. in 2009, has affected every industry and sector of life. Governments spent billions trying to correct systemic failures that began with the subprime mortgage crisis and led to a vicious cycle of reduced credit, business bankruptcy, and soaring unemployment. A 1930s-style depression was avoided at great cost to our public and private financial systems, but it could have been much worse.
Part of the problem was poor governance and a one-size-fits-all attitude toward economics at national and local scales. Banking professionals thought they could smooth over risky investments by diversifying across markets and product lines. They believed that what’s good for one community would be good everywhere else and that all that mattered was the big picture. This couldn’t work, and the financial train wreck that was 2009 proved this.
Why? Communities are diverse. Lenders and financial institutions failed to see us as individuals and how our individual differences impact each neighborhood. Every street is made up of unique transactions that can be strung together to create hot spots. The hot spots impact other areas, and like a financial cancer, they feed off each other, growing and merging.
The consequences of this? Tragedy— from a few faulty loans, we saw crumbled communities, wholesale foreclosures, and neighborhood blight. We’ve witnessed the topology of the failed financial network. Now, let’s fix it.
If banks and credit unions are to thrive in the “new normal,” they need to pay attention to information about each individual customer including lifestyle, location, and life stage. We have to begin with the most accurate information at the smallest scale possible and adjust our financial policies to this new reality. Only then will we avoid the mistakes of the past.