The Surprising Connection between Banking and Medicine
For finance professionals, "My word is my bond" (the motto of the London Stock Exchange from the 18th century) is reminiscent of the medical practitioner's oath, "First, do no harm." Both convey a deep sense of personal responsibility. More than that, they carry implicit warnings, designed to anchor these professions of immense responsibility in trust, accountability, and ethical conduct.
A bank’s balance sheet management discipline should embody these principles, serving as a visible commitment to stakeholders—customers, shareholders, regulators, and society—that senior management will uphold prudent liquidity standards, strong capital, and effective asset-liability management.
The medical oath warns against actions that could jeopardise a patient’s health. The mismanagement of a bank’s balance sheet can destabilise entire economies!
Like a physician’s record of care, the balance sheet is a testament to actions taken, not intentions declared. It is the ultimate proof of whether management has lived up to its commitment to safeguard the institution’s stability and uphold trust in the financial system.
The economist W. Edwards Deming said—“What you measure, you can manage. And what you manage, the numbers will expose.” He could just as well have said—“And HOW you manage, the numbers will expose.”
In short—the numbers will find you out.
"The balance sheet is everything!"
Why the balance sheet matters
When so many headlines focus on the speed and innovation of financial markets, it's easy to overlook a simple, enduring truth: “The balance sheet is everything”. Yet, despite its significance, it often takes a back seat to initiatives that promise innovation but overlook prudent financial management. We have witnessed avoidable failures at banks—from John Rusnak to HBOS to Archegos to Greensill—examples of what happens when basic financial principles are ignored, often in pursuit of short-term gains.
Just as banks are the lifeblood of commerce and industry, liquidity is the “water of life” for banking institutions. It ensures that banks can meet their obligations and serve the broader economy. Yet, too many banks, particularly during the global financial crisis of 2007–2009, and a few again in 2023, failed because they neglected the basics. Senior executives, hailed as “Masters of the Universe,” turned out to be ill-prepared for crises, prioritising hubris over prudence. As Quentin Letts wrote in 50 People Who Buggered Up Britain, these individuals were “bull-market innocents caught short by change.”
Are we still focusing too much on trends? Too often, the real work—the work of upholding a sound balance sheet—gets overlooked, leaving institutions vulnerable when the market turns. In The Principles of Banking, I note that—“The challenge isn’t in formulating a fit-for-purpose governance structure and risk management framework—that’s the easy bit. The challenge lies in actually doing it, making it happen, making it real.”
Saying vs. doing continued…
One of the greatest risks to a bank’s resilience through the cycle is the lack of a strong risk culture. Risk culture has only recently begun to receive the attention it deserves. It's easy for any firm to claim they prioritise risk management—just as they often claim to put customers first—but the reality is not always so simple.
That’s a common pitfall in industry generally: saying what sounds right, but not actually following through on it. Just as it’s easy for anyone to say they prioritise customer interests, it’s also easy to claim that they take risk management seriously.
Risk culture is more than a box to tick or a phrase to repeat. It's not just about having a risk framework in place—it’s about actually doing what you say you're doing. If the culture within a bank encourages shortcuts or fails to hold management accountable, the results can be disastrous.
At this point, one might remember the example of Credit Suisse, a globally systemically important bank, under close regulator scrutiny and with sophisticated and resource-heavy risk management policies, systems and processes. Despite its G-SIFI status, it succumbed to what one might perceive as poor risk culture, suggesting that no amount of regulation can save an institution with a flawed internal culture.
News stories concerning this particular “G-SIFI” bank had not been entirely positive for some years. The demise of the bank reminds me of this quote from “The Importance of Being Earnest”, a novella published in 1895…
The true test of a bank’s integrity lies in how its risk culture is reflected on the balance sheet.
The historical perspective
This principle of integrity and prudence isn’t new. George Rae, a 19th-century banker, warned of the need for vigilance in an era when “risk management” was the responsibility and accountability of the bank itself - and no-one else. Writing in an era without a formal regulator supervision regime or minimum capital requirements, Rae emphasised vigilance: "It will be the daily study of your business life...to distinguish at a glance those transactions in banking which are safe and legitimate from those which are unsafe and pernicious." His wisdom holds true: the integrity of the balance sheet is built on careful decision-making and foresight, not just compliance with rules or external pressures.
Challenging groupthink
Contemporary voices suggest that banks can rely on models, software, and outsourced expertise to navigate balance sheet management. Perhaps. Perhaps not. I argue in The Principles of Banking that there is no substitute for personal practical experience. Successful decision-making in complex environments is built on deep knowledge gained through years of hands-on practice.
During the 2007–2009 financial crisis, and I fear also in 2023, certain banks failed not because they lacked frameworks, policies and processes (in fact often they had a surfeit of them!), but because they failed to act on them. Risk culture was broken. Institutions had limits in place but ignored them, leading to catastrophic results. For instance, in one example I am aware of, one business line’s market-making activities exceeded risk limits by over 100%, yet no one intervened before the firm’s ultimate demise.
Actionable plans save institutions
How to get it right
To prioritise the balance sheet is to embrace the core principles of banking:
Hold Robust Reserves: As Rae advised, "Your reserve should always be sufficient to meet every description of demand upon it." In today’s context, this means not only meeting regulatory requirements but maintaining right-sized buffers that reflect the true risk environment today and over the cycle.
Understand Your Liabilities: Depositors entrust their money to banks, and it’s the banker’s duty to safeguard it. Stewardship is paramount.
Avoid Short-Term Temptations: A sound balance sheet prioritises long-term stability over immediate profits. This requires discipline and, above all, a commitment to principles.
Invest in Expertise: The balance sheet’s integrity depends on judgment and experience. Automated tools can support decision-making, but they cannot replace the human element.
The lessons of the 2008 financial crisis and again of 2023 are clear: banking is about more than managing money—it’s about managing trust. This trust is built on a culture of doing what you say you will do, from adhering to risk limits to upholding ethical standards. Without this culture, no framework, regulation, or model can save a bank from failure.
In finance, as in life, the numbers are the evidence. They show what’s been done, not what’s been promised.
— Charlie Munger, long-serving Vice Chairman of Berkshire Hathaway
As I have written elsewhere, the first principle of good banking is to have principles!
Going forward….
How does one transform technical banking concepts into actionable insights and practical steps? The Principles of Banking by Moorad Choudhry is rich with real-world examples, technical frameworks, and universal takeaways that professionals can immediately apply in their roles. Spanning topics like customer service and ethics, Asset-Liability Management, Basel regulations, and corporate governance good practice, senior finance professionals call this work indispensable:
“Whenever I see a book by Moorad Choudhry in a bookshop, I open and read a number of pages there and then. I always learn something. If you ever want a summary of where banking is at from the perspective of an insider, this is the book to read!”
—Tanveer Bhatti Group Head of Model Risk Management, Revolut, London
For beginners and veterans alike, this book will act as a reference point, guide and friend.
