Where Do We Go From Here?

The times are peculiar. Here we are, two years beyond the collapse of Lehman Brothers and the near collapse of the financial system of the fall of 2008. The system--thanks in part to bailouts and quick marriages of top firms--picked itself up, and a slow recovery ensued.


Yet we haven't returned to the euphoria of pre-2007, where deals proliferated, trading indices surged steadily and bankers could be choosy about what they wanted to work on and which clients they wanted to work with. Two years after the tumultuous fall, 2008, everybody acknowledges the end of the crisis. But few will admit times are booming in finance (or in certain sectors of the economy). And if there are faint signs of a sharp upturn or a flurry of new deals, transactions, and upward-moving markets, everybody treads carefully, as if to always prepare for the worst.


MBA recruiters in finance continue to knock on the doors of business schools, make elaborate, impressive presentations to first-year students. They try to lure students and impress them. But they recruit and hire with caution--with a steady peek at markets and business in the year ahead to assure themselves they won't stockpile their banking teams with associates only to be forced to downsize shortly afterward.


Still, post-crisis, there are deals to be done, investments to be analyzed, portfolios to managed, clients to be wooed, and business objectives to be met. New bankers, associates, and analysts are necessary to get it all done. Nonetheless, in the back of the minds of senior management at banks, insurance companies, investment firms, and funds is a lingering question: Has the tide turned for sure? The dark memories of 2008 continue to haunt.


Because of financial reform (including recent legislation and Basel III guidance), banks are treading most carefully. They must restructure vast parts of their businesses and are deeply entrenched in strategy sessions figuring out how to do it--how to conduct business, do trades, and make investments with a constrained balance sheet, with increased capital requirements and with rules that don't permit them to trade for their own accounts.


They must respond to questions: What do we do with our proprietary-trading desks? What do we with businesses that invest in new ventures and hedge funds? How do we make loans, underwrite securities, or trade derivatives when new rules that limit how much we can do or what we can do? And who will do it? How many are necessary to do it? For new MBA graduates or more junior finance professionals, what career paths will there be? And how do we attract top talent into a profession besieged by much uncertainty?


Meanwhile, financial institutions are pressured to show stable profits, revenue growth and business expansion. They ask: In the new environment, where will revenue growth come from? From a renewed focus on retail activities? From international expansion? From new products? From investing in businesses and products to boost market share?
Some have begun to take those first steps. JPMorgan announced expansion in international sectors earlier this year. Other big banks (including BoA-Merrill, JPMorgan and Credit Suisse) have begun to emphasize corporate banking more. Just about everybody wants to grow their private-banking and investment-management groups.

Because they must graple with these tough, strategic questions, financial institutions become hesitant about hiring too swiftly and too much. They are careful about making lateral hires, adding experienced talent or opening their doors to large numbers of new MBA graduates until they are sure the business opportunity is there or the returns on capital are sufficiently achievable. And until some of them figure out how to weave through the regulatory requirements.


Some are being forced to shed parts of their businesses (proprietary trading, hedge-fund-like activities, etc.). But even that's not easy, as they tenderly extract the parts (assets, people, systems, software, etc.) and then sell them or spin them off. That will take time, while they figure how to do it and to whom to sell. Some must decide what they want to be and do (Be a regulated bank? Be a pure brokerage outfit? Be a prop-trading fund?). That, too, will take time, as they weigh input from various stakeholders (shareholders, employees, the board, senior managers, etc.).


And some have decided that the best strategy is to become what they once were: a commercial bank with basic deposit and lending businesses, a brokerage firm without trading or banking units, an investment bank with no brokerage and lending units, an insurance company with no ties to banking and brokerage, etc.

Many, too, must patch up their reputations post-crisis and determine how to present themselves to the mass market--to consumers, to corporate clients, to trading counterparties, to regulators, and to the media and politicians. That hasn't been easy, because 2008's near collapse can is tied to--among many factors--behavior and activities from some financial institutions.

Financial institutions, too, continue to try to figure out the compensation puzzle--how to pay people handsomely, how to attract smart people to the profession, but how to do it in a way that will not irk shareholders and the public or draw gnawing attention from the media. How do they assure themselves they can show up at top business schools and attract eager, motivated students to join their institutions? What can they do to ensure that top mid-level talent (the deal-doers, the traders, the investors, the salespeople, the researchers, the operations experts) will not flee for other options?

With so much to figure out, so much soul-searching and so much trying to visualize what they want, can and need to be, they proceed or plod with caution. So instead of hiring 100 new MBA associates as they might have done in 2005, they settle for 50 or 75. Instead of bring aboard 20 new experts or professionals to take on a new product, new venture or new client base, they show restraint and start out with just 5 or 10--just in case the new business doesn't take off or regulation and balance-sheet constraints force them to grow slowly.

Most will contend current times are better than crisis times--that financial institutions are hiring, not reducing staff significantly; that they are doing business, not tending to emergencies or trying to save themselves, and that they are generating profits and satisfactory returns, not hunkered down to pare down losses. Nevertheless, there is still a feeling we're on the hump, just not yet far over it.
Tracy Williams

Now That You Are Manager....

You've just been appointed manager of your business team.

This is your first official role managing professionals. Your team includes four analysts, three associates and others who until now have been your peers. It might be a trading desk, a client-relationship team, a product sales group, an investment-research unit or a banking team focused on deals and corporate finance.

You have little managerial experience. You might have led the finance club in business school, directed special projects within your firm or supervised interns the previous summer.

What do you do? How do you recruit, hire, fire or transfer employees? How do you evaluate performance, promote talent, or encourage exceptional people to go elsewhere to reach their own goals? How do you articulate expectations and objectives?

How do you get the most out of team members day in and day out? How do you manage people, processes, business activity and operations to ensure all goals are exceeded?


Financial institutions are notable for not grooming management talent. They expect MBA associates to hit the ground ready to contribute significantly to deals, trades, investments, analysis, client relationships, product sales, risk management, business growth, and new client relationships. The pressure to win the deal, bring in more clients, or book the big block trade supercedes the firm's desire to help associates become competent, successful managers of business teams or larger units and sectors.


Analysts and associates spend several years in the trenches doing deals and winning business. They seek to build an inhouse reputation of being an outstanding trader, deal-doer, researcher, investment analyst or salesperson. And then one day, the firm appoints the associate to a vice president spot. Soon afterward, the one-time associate with little experience leading an organization is asked to manage a team of finance professionals.

Some institutions and companies have known track records in preparing people to be business managers and leaders from the day they start. We've heard about them and may have studied them in business school. Many are familiar with Jack Welch's management and leadership sessions at GE or the company's obsession with management depth charts and grooming those who will be division heads in the years to come.

Senior managers at GE or other large companies with deep management bench strength spend enormous time and resources identifying management potential. Recognizing and developing management talent is a priority.

Some big banks, singularly attentive to the next big deal, the next big trade, or the new big client, haven't always developed management talent sufficiently. They haven't devoted resources to help star deal-makers and client managers transition into critical business-management roles. Some know they have more work to do, but just don't get around to it.

Yet because of business demands, fierce competition from others in the industry, business mishaps or financial crises, or perhaps because of regulation, reform and pressing demand to develop new products, providing guidance to associates to become strong, effective managers and shrewd leaders is not necessarily a priority.

What can you do in your new management role, with a staff, a budget, and tough expectations about what you must accomplish? How do you motivate your team? When thrust in this new role, how do prepare without having to revert to old b-school texts in organization management, organization behavior, management accounting, or business leadership?

1. First, set team goals, objectives, and expectations. Define them and share them with all.
Get input on them. Review progress toward goals regularly. Be prepared to adjust goals and objectives if business conditions change.

2. With the team, be tough about those goals and expectations. Be serious about them, but be fair, flexible, and understanding of how people will reach them.

3. With staff members and employees, listen, be attentive, and be patient.

They have their ears to the ground. They understand markets, models, clients, operations, processes, and operations. They know people, have experience, and know how to get things done--whether responding to clients, regulators, internal auditors, or senior managers.

4. Communicate clearly, regularly and consistently. Provide constructive, prompt, logical feedback. Evaluate individual performance by evaluating goals, expectations and career next steps. Evaluate and provide feedback on an ongoing basis.


The team should never be confused or befuddled about priorities, expectations, and objectives. The team should not misunderstand how it has performed, where it fell short, or where it is making noteworthy progress.

5. Support employees' own desires to grow, get promoted and reach the next level. Support their efforts to develop, network, and increase knowledge in a specific topic or area. But do so within the framework of daily work responsibilities, project deadlines, client requests and other urgencies.

6. Show poise, be in control, and be calm. Speak sternly when necessary, but never in a rage, in a disrepectful way or in a profane way.

7. Professionals want to be respected and acknowledged. Show respect, be courteous, don't ridicule or be condescending. Don't taunt, talk down, threaten or instill fear.

8. Have confidence in the team and what members can do and accomplish. Boost confidence in those who have potential and talent, but are not sure of themselves.

9. Give team members a chance to have input, feel empowered, be accountable and feel like an important participant. Encourage others to speak up or insert their views without repercussion.

10. Let employees, staff members, colleagues and even those senior to you know that you are serious about what the overall mission is. Be serious about deadlines, projects, targets, goals, and tasks, but be readily available and helpful in all efforts to meet and complete them.

11. Professionals want to be well-compensated. Take compensation seriously, and strive to be fair and have a methodical, logical approach to it.

Professionals, too, like attention when they do well. Highlight publicly the importance of individual roles, notable accomplishments, good deeds, or special efforts. In other words, reinforce good behavior or exceptional performance.

12. Be comfortable and secure with letting team members have the attention, headlines or honor, if they deserve it.

13. Accept constructive input or new ideas, take them seriously and implement the best ones at once and with your strong endorsement. Informed, constructive feedback--even from staff members--leads to constructive progress and also new ideas, new products, and efficiencies.

14. When team members show progress, give their best or are developing steadily, show and express your commitment to such development. Be their champion or best advocate enthusiastically.

15. Be comfortable with allowing outstanding performers to depart and move on to the next level, if that is the only way they will continue to progress or if they prefer to be challenged differently.

16. Showcase and focus on the strengths of individuals. Provide support and assistance to manage weaknesses.
________________

The best managers appreciate, recognize and nurture the talent from the team that works around them. They allow the team to support and inspire them in the overall effort to lead.
Managing people, a team, group, sector, or the entire company is complex. By focusing on goals, objectives, and the strengths and talents of people, it can be rewarding.
Tracy Williams

Yet Another Ranking of B-Schools?

Yet another elaborate ranking of business schools? Like all others, does this provide the most comprehensive and useful assessment of business schools around the world? Or with the growing numbers that claim ranking authority, do they confuse prospects, professors and alumni all concerned about the value of MBA degrees? Do they help or undermine prospects' efforts to decide whether they should pursue an MBA and where they should attend?

The Economist magazine recently announced its latest rankings in a publication called ("Which MBA?"). (See www.economist.com/whichmba.) Its rankings are not new. The magazine has been at it for nine years. This year, however, they may rankle those who care about lists and rankings, because of the substantial shifts among schools in its top 10 and top 25.


As with many who dare to provide top 10 or top 50 lists, criteria matter. The magazine altered criteria significantly enough to produce a demonstrative change in its rankings. Critics will ask: Do business schools change that much from year to year to alter rankings that much? Or supporters will respond: Should criteria change whenever appropriate to ensure that business schools are emphasizing the right objectives or serving the most useful purpose?



CFN addressed concern, apprehension and usefulness in rankings in a May, 2009, blog (,http://consortiumfinancenetwork.blogspot.com/2009/05/rankings-take-peek-but-be-cautious.html) and provided guidelines on how to use them or when to ignore them. Numerous publications (BusinessWeek, USNews, WSJ, et. al.) produce their lists with fanfare and contribute to confusion and panic about which schools are tops and which schools are lagging.


Still, rankings proliferate, and those who read, study and perhaps care about them have gotten used to, say, a Dartmouth being no. 1, no. 5, or no. 11. All depends on who ranks and when. Eighteen months later, the advice is probably essentially the same. Take a peek at the rankings, but don't get obsessed by them.


Notwithstanding The Economist's latest rankings (where Consortium schools Dartmouth and Cal-Berkeley rank no. 2 and 3, respectively, on a global stage), it makes sense to review criteria. It focuses less on GMAT scores of entering students and evaluates schools based on the job they do to get students employed and get them into high-paying, meaningful positions (meaning, MBA-level jobs, where they use MBA-learned skills and are on a rapid MBA-influenced pace). It gives this a 55% weighting.

It also tries to measure the extent to which alumni networks can help spur an MBA graduate's career. Some b-school alumni become indifferent to or removed from their b-school experiences for many reasons. The Economist's criteria measure the efforts b-schools make to reach out and manage alumni networks for the benefit of students. The criteria suggest schools should spur alumni to want to turn back and assist recent graduates.

GMAT scores and a school's ability to attact smart students are acknowledged, but not weighted significantly. Starting compensation is weighted more heavily, although it understands that schools (especially international schools) that attract older, experienced students will likely produce graduates with higher starting salaries.

Business schools, of course, do teach courses, offer classroom instruction, promote inquiry, sharen knowledge in many business disciplines and sponsor invaluable research. The Economist understands how all that contributes to a high-quality graduate. But it is unapologetic when it says that these factors count less in its rankings. Hence, the prospect assessing a school based on the quality and depth of research in finance, accounting or operations or the experience of faculty wouldn't pay much attention to these rankings. And The Economist even says so.

As with many rankings, the familiar schools appear in "Which MBA?", even if the order or rank is different from list to list. Consortium schools fare well in this ranking and in many others. Sometimes there is no pattern in rankings from list to list.

In The Economist's sub-categories, Dartmouth, Cal-Berkeley, USC and Virginia are top-10 schools in helping students transition to new, different careers. Cal-Berkeley and USC are top-5 schools in presenting networking opportunities to graduates.

If actual order of rank is not obsessed over, rankings can be useful. They provide information or highlight schools that might not otherwise be known or might deserve more attention. If obsessed over, they detract from the major objectives of going to b-school or the experiences and knowledge that can be attained from attending.

Tracy Williams

Can Leadership Be Taught?

The debate is probably as old as commerce itself. Can competent business leadership be taught? Is it something inherited? Is it an inborn trait? Or can it be developed, taught, groomed, or nurtured? Can business schools teach students to develop habits, skills, practices, knowledge and analysis to become strong senior leaders of major corporations?

The Consortium's IN Magazine (online at http://www.inmagazine.cgsm.org/) permitted two Consortium alumni to tackle the same questions. They hold their "debate" in the latest issue. Alumni Michael Carson and Christopher Earley each take sides and go at it--of course, in a respectful, business-like way. There are no easy answers to the question, no matter if some think so. Carson and Earley recognize that in their analyses.

There are some skills, experiences and background senior managers and strong leaders must have. They aren't necessarily born with them. On the other side, some people have natural tendencies to manage complex organizations, convince constituencies of their points of view, and execute business strategy (or "make things happen").

In the leadership of global financial institutions, skills, background and knowledge are a necessity to lead and run complex organizations. Even the best bank CEOs of global banks can't run their organizations without a sufficient understanding of capital markets, market and credit risk, bank products, systems and technology, and financial regulation. More and more, they also need to understand global cultures, politics and economics.

But if all else is equal (meaning, if we assume among top-tier managers, knowledge and skills are equal), will the best leader be the one who learned leadership in school, learned along the way to becoming senior, or simply has an inherent ability to manage, execute, visualize and inspire?

When evaluating leadership, performance (based on such widely known metrics as return-on-equity or percentage increase in stock price or market value of the firm) counts for much. Performance will typically be the first benchmark in determining who is a good leader or who is mediocre and drifted up the ranks with good luck in hand.

The ability to execute counts, too. The best leaders--despite what might be happening on the bottom line--manage to overcome obstacles and resistance to get things done. That can be projects, acquisitions, expansions, and innovation. It can also be managing through disaster, catastrophe, or regulatory hurdles. Often, execution and performance are correlated

Charisma counts, too, although it's hard to define or describe. Strong leaders are able to inspire employees, get the best and most from them, and harbor a culture where people want to be there and want to contribue. They have that something special to win over clients, squash bureaucracy and inefficiencies, and encourage boundless innovation. They get others to follow them, because others believe the creed, understand the mission, or enjoy the culture within which they work.

The debate above is really then about whether these qualities and abilities can be learned in business school or developed along the path to senior management.

Business schools, we know, can't hand over a platter with a to-do menu that shows the budding executive how to be a strong leader. They can, however, study and assess strong leadership in the past and show how leaders were effective in numerous circumstances, business situations, or industries. They can show how they fared in financial difficulty or how they might have overhauled an organization through bankruptcy. They can show how they envisioned and pushed for expansion, innovation, or new ideas and products. They can show how they re-engineered companies, directed them into new businesses or products, or boosted performance by cutting costs without killing the enterprise.

In finance, over the past several years, assessing strong leadership has been tricky. Those who were described as powerful, effective leaders a decade ago were being blamed for the financial crisis years later. In 2005, few could be found who might have said the leaders of Merrill Lynch, Lehman Brothers, Wachovia, and AIG were incompetent, clueless or out of touch.

At Merrill, CEO Stanley O'Neal rode the coattails of a senior mentor, but proved himself along the way to be smart, detailed-oriented, meticulous, and extraordinary astute about cost-cutting and boosting Merrill's returns. He had a reputable background in investment banking and spent time as CFO.

Once the crisis came about, O'Neal was suddenly regarded as aloof, unaware of the risks the firm had been taking throughout its product lines, unfamiliar with the nuances of mortgage products and securitization, and incapable of gaining a full grip of the risk-management role.

Former Merrill CEO John Thain was considered one of the brightest, young leaders at Goldman Sachs during his rise there. He moved on to be the vital force that led the New York Stock Exchange out of the dark ages of sort by expanding the organization, taking it international, welcoming its electronic transition and revolutionizing how it oversaw stock trading around the world. Yet at Merrill, he is considered the one who never fully grasped the deep problems at Merrill or never successfully disclosed the extent of them to outsiders.

At Lehman, Richard Fuld for years was considered its heart and soul. He was the link to the old-boy Lehman, the senior banker who brought Lehman back from its early 1990s ashes (when it was owned by American Express) and marched it back to its prestigious bulge-bracket status by the mid-2000s. It was his leadership, many said years ago, that willed Lehman back into solvency in the late 1990s' financial crisis, when rumors about its liquidity problems almost sacked the firm.

Today, many consider Fuld (along with Bear Stearns' Jimmy Cayne) an example of senior leadership without a clue of how the complicated organization below him was run or with no understanding of the risks of mortgage products and high leverage on the balance sheet.

At Goldman Sachs and at the U.S. Treasury, Robert Rubin was considered a stalwart, bright leader. The history books say Goldman Sachs separated itself from the pack under Rubin's leadership. These days, some want to blame the financial woes of Citigroup on him, when he was a senior insider at the bank and observed much of the decision-making that led to disastrous results during the crisis.

The lesson here is that those who assess competent leadership shouldn't be so quick to attach labels. Or they should develop more careful, thoughtful criteria and assess leadership not over the span of a few momentum years, but the span of a long career. They should assess leadership in the face of many scenarios, circumstances and benchmarks.

This doesn't, however, address the original question: Are the best leaders born that way? Some are born with or develop traits that contribute to outstanding leadership: passion, confidence, enthusiasm, intensity, etc. Many, however, learned the trade along the way, mastered their industry or function, established networks and relationships, and sprouted from a foundation of skills they learned long ago (while in business school?). The best leaders combine skills and natural abilities: They combine accounting and finance skills with passion and intensity, for example.

There is no easy answer. Carson and Earley in their own essays tackle the topic and deserve a hearing. Some things can't be dismissed, however. If you plan to become a strong leader in finance or plan to lead a bank or financial institution, you can't do it without a competent appreciation and understanding of accounting, finance, capital markets, economics, marketing, organization management, financial regulation, and business policy--skills you can, for certain, pick up in business school.

Tracy Williams

CFN: Wrapping Up the Second Year

The Consortium Finance Network is nearing the end of its second year with over 480 members across the country.

We recently hosted our fifth in a series of webinars ("The CFA and the MBA"), continue to meet with students and alumni in finance, provide guidance to all wherever we can, and arrange connections among Consortium alumni and students. Discussion in our Linkedin group is lively and covers many topics. We update blog postings weekly.

As we wrap up 2010, we welcome feedback, ideas, and suggestions about where CFN can go from here. We encourage all to step up and support CFN in many ways. The Steering Committee meets often to assess ideas, plan and execute projects and contemplate where we go next.

We are considering forming an Advisory Board of experienced people in finance interested in CFN's objectives and interested in being continually involved. We welcome input on its formation.

We encourage all to contribute to the discussion in Linkedin. Tell us what's working and not working. Help lead projects, participate in Steering Committee meetings, or make meaningful suggestions. We'll all in this together.

In 2011, once again we hope to plan more webinars, networking events, and another first-year MBA guide. We hope to have a bigger presence at the Orientation Program and host a major alumni gathering (as we did in 2009 at the Federal Reserve).

We'll continue to pair students with experienced professionals and help them in any way possible (interview preparation, career coaching and strategies, etc.). And we want more input, involvement and enthusiasm from more members.

Within Linkedin or on the website, we encourage the exchange of ideas, experiences and viewpoints and the sharing of knowledge about any aspect of finance.

Share your ideas and feedback with us, and stay involved.

CFN Steering Committee
Tracy Williams
Rachel Delcau
Camilo Sandoval

Keeping Up: Basel III and "Capital Cushion"

Basel III is a term bantered about a lot these days, when people in finance ponder financial reform and try to list solutions to enormous risks banks took in the last decade. Basel III is no longer a proposal or a thesis of scholarly recommendations for how banks can clean up their crisis-torn balance sheets. Basel III is a set of risk-management guidelines that large banks are expected to follow. The leading nations (under the auspices of the "Group of 20") that help manage global economic and financial issues agreed Sept. 12 to implement Basel III.

Basel III, in its most basic form, provides capital and balance-sheet rules for banks around the world. The nations who agree to follow the guidelines also agree to enact, execute and enforce regulation within their own countries that adhere in principle to Basel III.

Basel III, of course, follows Basel I and II. Basel II never really got off the ground because its deadlines had not arrived. It was never fully enforced, because the financial crisis of the past few years interrupted. If Basel I and II couldn't minimize the severe impact of the crisis among banks, the logical goes, then a stronger, more effective Basel III could. Despite recent agreement among nations to roll out Basel III, it is not without critics, who believe Basel III might not be sufficiently tough enough to keep banks from accruing too much risk in the future or who believe its guidelines don't address the broadest set of banking and financial-system issues.

Basel whatever (I, II, or III) in spirit suggests that banks can protect themselves from unforeseen risks (bad loans, bad trades, market downturns and swings, interest-rate volatility, etc.) by having an adequate capital cushion. This is not about having capital to invest in business growth, new business or new acquisitions. This is about having capital as a balance-sheet cushion, a way to soften the blow when extreme risks or market catastrophe occurs--the kind we certainly experienced the past few years. The Basel guidelines offer a way to ensure that even unexpected losses will be bearable, a way to ensure that the banks' creditors, liability-holders, depositors, and lenders will be comfortable through a crisis (and be paid if debt is due).

Some global banks successfully endured the crisis because they managed risks carefully, avoided risky businesses and trading, and minimized losses. Other banks, despite heavy losses in mortgages and corporate loans, survived it well because they had ample capital--amounts far in excess of minimum requirements. The losses didn't hurt too much.

Whatever the capital requirements, banks manage business activity and growth around them. Given a level of equity capital, banks will determine the level of business they can conduct (lending, trading, brokerage, advisory, etc.) to ensure ongoing compliance. Other banks may approach requirements differently. They determine the amount of capital they need to do the business they seek to do. This assumes, of course, they will have access to markets to increase capital, if necessary.

(Some large banks manage capital requirements based on two guidelines: (a) minimum requirements based on Basel and bank regulation and (b) requirements based on their own calculations or perceptions of risk. They do this, in part, to capture activities that might occur in subsidiaries or entities not subject to bank regulation.)

Some finance experts argue that the greater the capital cushion, the better the bank can confront unsettling financial situations. Some, however, argue that while a capital cushion is necessary, there shouldn't be too high of a minimum requirement. Too much of a minimum cushion, they argue, stifles business growth and encourages banks to maintain balance sheets with large amounts cash reserves or liquid minimum-risk securities (U.S. Treasuries, e.g.) and not enough in consumer or corporate loans. Or it may discourage the bank from taking on incremental business.

Basel III, as before, requires banks to adjust all assets on a risk-adjusted basis and sum them up. (An unsecured corporate loan, for example, is not risk-adjusted, but collateralized loans or Treasury securities are "discounted" because of reduced risk.) Basel III requires banks to have a minimum amount of capital ("Tier 1 capital"), relative to the total risk-adjusted assets, based on new rules. The requirements will start from the existing 4% and step up eventually to 6% by 2015. Afterward, it will require an additional "buffer" of 2.5% by the end of this decade--more than doubling today's requirements by 2019.

Basel III also does something Basel I and II skipped. It will introduce limits on balance sheet leverage. In the past, a bank could have unlimited leverage if it chose, for example, to stockpile assets with risk-free Government securities. It will also penalize bank trading done away from central exchanges or risk-reducing clearing organizations.

The new requirements are outlined and quantified in painstaking detail. But what does this all mean? What are the implications to banks, bankers, and even those interested in working in financial institutions?

1. BALANCE SHEETS. Banks over the past decade have always been "balance-sheet sensitive." Basel III will make them more attuned to balance-sheet dynamics. Almost every large deal, trade, transaction, contingency, loan, or asset purchase or funding agreement will be analyzed to assess the impact on the balance sheet and capital requirements. More than before.

Before they do big deals or engage in large trading activities or expand into new businesses, banks today assess activity in "balance sheet/capital committees." They ask whether the new business is worth going onto the balance sheet or whether it will increase capital requirements.

Some impose internal balance-sheet or capital-usage penalties, hurdles or high-return requirements. The business unit receives a "penalty" cost or internal tax for using the balance sheet. Some banks call it an "asset tax." Some banks require extra "rewards" or returns for the incremental capital required. Banks have been implementing these penalties or extra requirements for the past two decades. But sometimes they overlooked these internal penalties when business surged.

With more stringent Basel III requirements, they will implement tougher requirements on business units and more "penalties" or "costs" for using capital or the balance sheet. Or they may require business units to justify harder why incremental business makes balance-sheet sense.

2. COMPUTING. Calculating assets (loans, trades, deposits, derivatives, reserves, securities, receivables, etc.) around the world, adjusting them for risk and doing so on an ongoing basis can be a systems and procedural nightmare for banks. As they had started to for Basel II, banks will devote more resources (including capital, ironically), personnel and technology to not only perform calculations and ensure compliance with requirements, but also to anticipate what they will be as business grows, changes and expands.

Over the past decade, calculating what goes onto the balance sheet for new banking products (derivatives, illiquid securities, infrequently traded securities, leveraged loans, etc.) has not been easy. Banks will seek to have a real-time system of knowing how much they are in excess of requirements at all times and in projecting the impact of new activity.

3. MARKET PERCEPTION. Banks have always managed to stockholders' expectations and will continue to do so. The market itself will have a view of banks' compliance with Basel III, even if (a) many large banks are already in compliance and (b) if the new requirements won't need to be met for years to come. Shareholders and equity markets will want to know if banks today can meet the eventual requirements and if banks have excess amounts even above the minimum for 2012 or 2015. Sending a signal to markets that a bank might have trouble meeting requirements or doesn't have excess could knock down the price of its shares. Banks know this and will manage to tomorrow's requirements, not what they need today.

4. MANAGEMENT. Especially those involved in corporate banking and trading, where activities have significant impact on balance sheets, bankers and traders will need to understand the impact of the rules more than ever. Sometimes in the past, a corporate banker, investment banker or trader relied on a compliance or regulatory colleague to worry about capital requirements. They booked trades or new loans, underwrote new securities, or accrued new activity until they were told to slow down or stop.

Going forward, they won't need to memorize the rules, but they'll need to have a keen awareness of the impact of complex business activity on the balance sheet. They will need to be more involved in bank-wide discussion of whether capital is being deployed in proper ways--to maximize returns and to ensure there is excess beyond the Basel III cushion requirement. These discussions can be complicated and political, especially if banks don't have procedures or methodology to address capital issues and requirements for new businesses.

Bankers most familiar with the guidelines and the impact of current or new business on balance sheets tend to fare well in these discussions or at least get their business points heard more clearly and logically.

They also tend to show senior management they are thinking along similar lines.

Tracy Williams

The CFA: Where It Makes Sense

MBAs in finance will often ask about the benefits of a CFA designation. Does it make sense? Will it propel my career? Can I learn something that will give me an advantage on the job or in my career? Are more and more employers requiring it? Or if I'm in transition, will it make a difference in getting attention and gaining an offer? Is it all worth the time, effort, and costs?



There are pros and cons, advantages and disadvantages in pursuing the CFA, if you have an MBA in finance already. And within Consortium and Consortium Finance Network circles, some have debated each side.



To help all sides in the ongoing discussion, CFN hosted a webinar Oct. 5, "The MBA and the CFA," to address these questions, to explain in depth what it means to pursue the CFA and to present data that show trends, growing popularity and greater demand for those who have it. (Click here to download the recording  or click here to view the slide deck.)



Charles Appeadu, Director of Sample Exam Development at the CFA Institute, was the featured presenter. "The CFA," he reminded webinar participants from across the country, "is regarded around the world." He added, "A lot of people think it's only about investments, but the content cuts across many fields. The content is deep and wide."



To prove the global reach of the CFA today, Appeadu said there are now over 99,000 people with CFA designations. About 67,000 are in the U.S., but a rapidly growing percentage of the total comes from other countries, reflecting the widespread regard for and attraction to the CFA from companies, investment funds, and financial institutions worldwide.



Appeadu said that once you have the CFA, "We (the CFA Institute) make sure you keep abreast of current knowledge and equip professionals with competence and integrity."



He presented statistics to show what those with CFAs do currently: About 22% are in portfolio managment, another 14% in securities analysis and research. About 4% are in investment banking. And 7% of CFAs globally are in C-level roles (CEO, CFO). More than a third are in positions that emphasize investment analysis, research or management in some form or another. In some of these roles, the CFA is either preferred or required.

Many CFAs, however, are in roles that may not require or may not have traditionally encouraged the CFA: consulting, risk management and accounting, for example. They have used the CFA not as a designation to meet requirements or to prove legitimacy in investment anlaysis, but as a knowledge base for other areas of finance.



Over 200,000 people are currently registered for the CFA--which means they are pursuing the CFA by preparing for one of the three levels of exams. Appeadu showed the trends of a growing number of registrants from foreign countries. (For now, most registrants are from the U.S.) Registrants have similarly expressed interest in a wide range of fields, indicating how they expect to use the CFA--from portfolio management to investment banking, corporate finance and consulting.



Webinar participants didn't hestitate to ask questions. Some wanted to know if there were scholarships to defray the costs of preparation (for the volumes of material required for study). There are, and many financial institutions support employees who express such interest. Some wanted to know whether the CFA Institute does or will ever provide an "MBA waiver," because of the overlap between MBA coursework and the CFA material. "No, but we get asked that question all the time," Appeadu said. One wanted to know if the CFA can be helpful in careers in commercial real estate.

Many wanted to know more about preparing for the three levels of exams. Appeadu said a candidate usually needs about 250 hours of studying for each exam, sometimes more. Candidates study the CFA-provided material, but they can seek and use supplementary sources. He emphasized the importance of preparing for the exams. On average for all three exams, the pass rate is about 42%, a rate that is fairly consistent among those who take it around the world and who have taken it over several decades. The same exam is given everywhere in English.

Appeadu, who has a Ph.D. in finance as well as the CFA, explained how the pass rate could be higher. Many candidates, he said, tend to be smart, well-educated and well-versed in finance and investments. They are also used to being successful and making swift progress in academics and careers. More confident than they should be, they, however, tend to underestimate the time and attention required to prepare for exams. "They sometime think they don't need to prepare as much," Appeadu said, "and then become overwhelmed."

In the exams, Level 1 focuses on knowledge. Level 2 is about analysis, and Level 3 is evaluation and synthesis. Levels 1 and 2 are multiple-choice questions (graded by computers). Level 3 includes essays graded by humans.

Registrants can take practice exams. Participants wanted to know if there is a relationship between performance on the practice exams and the real exams. There is a high correlation, but Appeadu reminded his audience there is no direct "causality," that if one does well in practice, then it doesn't mean he/she will do well on the exam.

For each exam, Appeadu explained, there is no consistent cut-off for the percentage number of questions an exam-taker must get correct. A committee of experienced experts each year determines what it thinks a "just qualified" candidate should know and how many a "just qualified" candidate should get right. That number can change from year to year, as exam questions and content change.

Because finance topics, issues and investment products evolve and get more complex, CFA content changes, too. The material covers ethics, risk management, new products, and may even cover topics such as Islamic finance.

Appeadu, who taught finance at Wisconsin-Milwaukee and Georgia State, lamented the small number of registrants and CFA charter-holders from under-represented groups. He said there is no accurate data about minorities who hold the CFA (among the 99,000) and who are in the process of taking exams (among the 200,000). But the numbers are low. "We want that to improve," he said. The CFA Institute has embarked on initiatives to spread the word by making similar presentations around the country, even speaking to undergraduates at HBCU schools.



Appeadu weighed the pros and cons of the CFA and the MBA. (The CFA Institute didn't have information on how many of the 99,000 have MBAs.) Some will ask whether an MBA should get a CFA; others will ask differently: Should one pursue the CFA and not bother with the MBA? He showed the MBA's advantages of networks, connections, contacts with professors and corporate recruiters and the broad business curriculum covering operations, marketing, accounting and policy. He showed the CFA's advantages of costs (relative to MBA tuition) and specialized knowledge and expertise.

In the end, he said he was a proponent of both. "The MBA is a degree," he said. "The CFA is a designation." In many ways, he showed, both are about a lifetime of learning, keeping up and maintaining networks and industry ties.

Tracy Williams