In any financial institution that’s working toward more streamlined, more meaningful, and more strategic processes and metrics, once an operating rhythm is in place, there’s a temptation to believe the hardest work is behind you. Reporting is integrated, pricing is tighter, portfolio review is more consistent. From a distance, the system looks sound. What becomes clear over time is that structure doesn’t preserve itself.
Standards loosen incrementally. A concession gets justified because a client relationship is strategic, or a review gets expedited because timing is sensitive. Some team with a strong track record gets latitude others might not receive. Each decision makes sense on its own, and collectively they shift expectations without anyone noticing until the expectations have already moved.
Governance is most vulnerable during the stable stretches: capital ample, liquidity steady, margin acceptable, relationships expanding. Performance looks reliable, forecasts hold, and exceptions seem manageable.
In my past role at a large bank, I recall a period when results were strong and dispersion was narrowing. Pressure mounted to accelerate growth in a segment we’d previously constrained under capital focus. The argument was logical. Conditions had improved, we’d earned flexibility, and the discussion carried momentum. What held us back was institutional memory. We’d seen how quickly things drifted during the last favorable stretch, and the decision was to keep the same documentation and review intensity in place even though it slowed momentum slightly.
The flip side is what happens when enforcement gets uneven, which it inevitably does if you’re not deliberate about preventing it. High performers get discretion others don’t, legacy relationships are treated with more latitude, documentation quality drifts, and nobody announces any of it. In my own experience, one well-defended exception without a clear economic expectation attached to it created ambiguity about what would be required going forward. The economics weren’t flawed; the standard had just shifted enough to make the next conversation harder, and it took months to clean up.
Before returns deteriorate meaningfully, the signals are there if you know where to look. Exception rates cluster unevenly, forecast accuracy requires more explanation, capital intensity rises in pockets, and dispersion widens across teams. I learned to watch the shape of performance rather than the average. A portfolio can report acceptable overall return while containing widening gaps beneath the surface, and those gaps tend to cluster where review intensity softened or documentation thinned.
Here’s one that stuck with me. In a favorable stretch, overall exception volume stayed inside policy thresholds. There was nothing alarming on paper. What caught my attention was the timing. A disproportionate number of approvals landed in the final weeks of the quarter, tied to projected deposit growth not yet materialized. The following quarter, some of those projections didn’t hold, and while the income statement was fine, the pattern needed recalibration.
I’m not sure we would have caught it if we hadn’t been tracking timing and concentration rather than just volume. This is the kind of thing that falls through the cracks when governance loosens. By the time it shows up in headline results, your options have narrowed considerably.
Adapted from “Beyond Pricing: Disciplined Performance. Real Impact” by Nicholas Koutouras.