THE TEN COMMANDMENTS OF BANKING

Timeless axioms for bankers and investors.

“Though the principles of the banking trade may appear abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from these rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the bank which attempts it.”

- Adam Smith, The Wealth of Nations (1776)

1. Thou shalt not covet thy competitor’s performance

“Nothing so undermines your financial judgement as the sight of your neighbor getting rich.”

- J. Pierpont Morgan, former chairman of J.P. Morgan & Co.

“Mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the institutional imperative: the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

- Warren Buffett, chairman and CEO of Berkshire Hathaway

“The 'sound' banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”

- John Maynard Keynes, author of The General Theory of Employment, Interest and Money (1936)

2. Thou shalt not seek growth at the expense of solvency

“It is one of the oldest adages in our business that the lender that grows fast is the lender with future losses.”

- J. Christopher Flowers, managing director of J.C. Flowers & Co.

“We can make loan growth be anything you guys want for a period of time before it comes back to haunt us.”

- William Demchak, chairman and CEO of PNC Financial Services Group

“It’s easy to grow short-term earnings: just stop investing in your company’s future and compromise your standards on accepting new clients and business.”

- Jamie Dimon, chairman and CEO of JPMorgan Chase & Co.

“If our lending apparatus had a systemic weakness, perhaps it was the result of our emphasis on growth. Because growth was a function of the number — rather than the quality — of loans we made, no one wanted to say no. No one wanted to be the messenger who issued a caution that resulted in a drop in earnings. We'd prided ourselves on growth, and frowned upon any gesture that restrained it.”

- Robert Smith, former CEO of Security Pacific

3. Thou shalt not proclaim one thing then do another

“The real insight you get about a banker is how they bank. Their speeches don't make any difference. It's what they do and what they don't do that matters.”

- Warren Buffett, chairman and CEO of Berkshire Hathaway

"It's what you do, not what you say, that matters. It's easy to write up cultural principles, but if the organization doesn't see you do the right thing rather than the most profitable thing, then the people won't believe you."

- Ed Clark, former CEO of TD Bank

4. Thou shalt not sacrifice risk at the altar of revenue

"Banks get in trouble for one reason: They make bad loans."

- Carl Webb, co-managing partner at Ford Financial Fund

“When you think about what in fact distinguishes a bank as a lender, it's how much money it loses on the assets it chooses to take risk with.”

- Joseph Ficalora, former chairman and CEO of New York Community Bank

"As a banker, you can do a lot of dumb things so long as you don't make bad loans."

- Robert Wilmers, former chairman and CEO of M&T Bank

5. Thou shalt not speak ill of an ailing competitor

“A system like the banking system, in which the interests of all are so intimately interwoven, must be treated with great delicacy. A system dependent solely on the public confidence, should itself exhibit confidence. Any doubt thrown upon one member must excite doubt as to them all. This was proved yesterday. When the discrediting of the Bank of Pennsylvania was made public, the run upon the other banks commenced. Instead of arresting the difficulty, the distrust of that bank was transferred to the others. The bankers showed their want of confidence in one bank; the public at once declared their want of confidence in them all.”

- The Philadelphia Enquirer, September 28, 1857

6. Thou shalt not be tempted to finance speculative real estate projects in distant, desirable locales

7. Thou shalt not forget that a bank’s obligations are payable on demand

“You can afford to run much less risk in banking than in commerce, and you must take greater precautions because a banker, dealing with the money of others, and money payable on demand, must be always, as it were, looking behind him and seeing if payment should be asked for.”

- Walter Bagehot, author of Lombard Street: A Description of the Money Market (1873)

“The key to a proper appreciation of the position of a banker towards the public lies in the proper understanding of the fact that the majority of his obligations are payable on demand. The fact is hardly realized in many quarters that a banker's deposits may be an actual source of weakness to him instead of strength, and that in cases of panic or of temporary lapse of confidence his danger may be commensurate with the amount of such obligations.”

- Ernest Sykes, Banking & Currency (1904)

8. Thou shalt enlist frugality as a weapon of commerce

“Being a low-cost provider gives one a tremendous strategic advantage. It allows you to deal with challenges, be competitive on the asset and liability sides of the balance sheet and take care of customers.”

- Jerry Grundhofer, former chairman and CEO of U.S. Bancorp

“When you're in a commodity business, the only way to thrive is to be a low-cost producer. And when you're selling money, you're in a commodity business.”

- Warren Buffett, chairman and CEO of Berkshire Hathaway

“You can't control income — it varies based on conditions outside your control — but you can control expenses.”

- Sandy Weill, former chairman and CEO of Citigroup

9. Thou shalt strive for consistency over amplitude of performance

"The goal [is] not only to earn high returns at the top of the cycle but also to avoid giving them back at the bottom."

- Duff McDonald, Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase (2010)

"Strict adherence to conservative business methods will provide a steady gain in the value of business and a corresponding improvement in net profits."

- W. Fleming James, former president of Farmers & Merchants’ Bank in Abilene, Texas (known today as First Financial Bankshares)

10. Thou shalt never forget that cycles always prevail, eventually

“It is in the nature of an industry whose structure is competitive and whose conduct is driven by supply to have cycles that only end badly.”

- Barbara Stewart, former chief economist at Chubb Group

"Run your business knowing it might be sunny, it might be stormy, or in fact it might be a hurricane. And be honest about how bad a hurricane might be."

- Jamie Dimon, chairman and CEO of JPMorgan Chase & Co.

“It's essential to remember that just about everything is cyclical. There's little I'm certain of, but these things are true: Cycles always prevail eventually.”

- Howard Marks, co-chairman of Oaktree Capital Management