A man who made his mark, and his fortune, helping small banks and credit unions compete in an increasingly challenging economic environment has just published a new book on why he thinks such institutions are so important.
Too Small to Fail: How the Financial Crisis Changed the World's Perceptions by Louis Hernandez Jr. also takes a look at how the subprime crisis and ensuing banking meltdown occurred and issues a call to action for community financial institutions and their leaders to assert their proper role in preventing a repeat.
Hernandez is the chairman and CEO of Open Solutions Inc., a Connecticut startup he joined as a $10 million a year venture and led to its current position as a global provider of enterprise electronic commerce solutions to more than 4,000 clients.
He took the company public and then private again in a $1.5 billion transaction and then reinvested $80 million in refining its service and product direction. The core platform remains built on relational database technology-facilitating the ability to connect best-of-breed solutions from other entities-and Hernandez's feelings about why small financial institutions are so crucial also reflect that appreciation for the importance of connectedness.
He argues that technology effectively deployed not only helps small financial institutions provide services that consumers demand across multiple delivery channels, it helps the system itself by maintaining the connectivity, the high touch among the high tech, that's essential to the integrity of what, essentially, is a conservative relationship: the caretaker of an individual's personal and family financial wherewithal and the essential participation of those financial institutions in the economic life of its local community.
Indeed, Hernandez argues, it was a disconnect by the major players-drives to squeeze interest margins and increase noninterest income he cites as prime examples-that led to the subprime crisis and banking collapse that was followed by a government bailout of financial institutions deemed too large to fail.
Technology infrastructure also played a role, Hernandez said.
"As industry pressures mounted, poorly integrated, outdated and inaccurate information contributed to the disjointed nature of the subprime and related credit and risk decisions," he said. "Large institutions thought to be more stable with their scale benefits, diversity and capital bases proved to be, in large part, the weak link as the economic environment became more difficult,"
Meanwhile, smaller institutions-including credit unions-stayed closer to their core values and core systems, he said, but could now face the same fate as their larger brethren as increased capital and regulatory requirements serve to punish the smaller institutions who were not responsible for the collapse in the first place.
"The danger is that we might be placing the strongest piece of our financial system-the credit unions and banks that held their own paper, that stayed out of the subprime market, that stayed close to their communities where they live and work-into the weakest piece," Hernandez said.
"That's why our new mantra here should be that these are the institutions that are too small to fail," he said.
There's also vast new potential here, too, if small institutions can continue to offer the same products and services as major entities while retaining their own inherent advantages, Hernandez said.
"This need for a trusted financial intermediary focused on local community needs in an increasingly complex and global economic landscape creates a fantastic opportunity to not only address the business model dynamics in the industry but also fulfill an important social and economic role that was part of the industry's foundation," the Open Solutions CEO said.
As for his call to action, "for the past couple of years I've felt the need to speak this way to this network of community financial institutions that has been so good to us and that we know is so important ... I'm trying to tell them that you have to be more collaborative," he said.
"At Open Solutions, we're trying to do it from a technology perspective, trying to make it easier for you to share ideas at a lower cost. But we also have to recognize the need for strong leadership to step forward and help people recognize the strength of this collective network we have here," he said.
"Courageous, thoughtful leaders among us will have to emerge to show the way, commit to their communities and institutions and embrace the core values of the industry while addressing a very different operating backdrop," Hernandez said.
"This call to arms for the best and the brightest will be more important than the resolution of the recent [banking crisis] in the sense that it will set the stage for the future of the industry," he said.
Published by AuthorHouse, the book is available online from Amazon and Barnes & Noble and directly from Open Solutions. Hernandez said net proceeds will go to the foundation he created to help fund initiatives in health care, children's issues and education.
The former academician (Hernandez taught at the college level for two years in California, where he also earned his CPA designation) had to nurse his creative muse by squeezing time to write into his hectic schedule.
"This book was written on my laptop in airports and on airplanes and on a lot of Saturday and Sunday nights," he said. "It seemed like a good idea when I started out, but it really became a time crunch with all the writing and editing involved."
"It ended up being a large project, but I'm glad I decided to do it. Although I was equally happy when I finished the last sentence of the final edit," Hernandez said.