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2008 Distinguished Alumni Awards
Karen Parkhill, '92, Young Alumni Award
Spend Five Minutes with Parkhill
Image by Matthew Gilson
At JPMorgan Chase & Co., Karen Parkhill, ’92, parlayed a decade of investment banking success to become CFO of commercial banking, a line of business with more than $4 billion in annual revenue and 4,000 employees.
Chicago Booth Magazine asked professor Anil Kashyap to pick Parkhill’s brain on the value of Basel II, the challenges of the current credit cycle, and the future of commercial banking in the United States.
With her new MBA in hand, Karen Parkhill, ’92, joined banking giant JPMorgan. She quickly moved from mergers and acquisitions to investment banking, where she spent the next 13 years managing transactions and advising clients across several industries. In 2005, she switched to commercial banking and was named CFO, a move that earned her the 2008 Distinguished Young Alumni Award. Over the summer Parkhill fielded questions from banking expert Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance, on whether the banking industry must change.
Kashyap: In the wake of the Fed’s and Treasury’s involvement with Bear Stearns, it seems like a rethinking of the banking regulation is coming in the United States. What do you think the imperatives are?
Parkhill: Currently, the financial industry is governed by several regulating authorities. Any time you have many chiefs, there can be situations where the directions are misaligned. One change our leaders in Washington can make is to consolidate the various authorities into a single regulatory regime that governs all the market players — investment banks, universal banks, commercial and retail banks, and large funds. All these institutions have shown they can have a significant impact on the health and stability of the global markets — especially as they become larger players.
Kashyap: Basel II puts internal risk models right in the middle of the setting of capital standards. Given the scenarios of these models to spot many other problems that emerged over the last year, do we need to reconsider Basel II?
Parkhill: From my perspective, Basel II is a big improvement from Basel I. If it had been put in place earlier, it might have helped to better capitalize some of the struggling financial institutions out there. Basel I takes a simplified approach to credit risk; it does not take into account the quality of loans or other debt obligations. For example, under Basel I, a loan to a AAA-rated institution requires the same amount of regulatory capital against it as a loan to a single B-rated institution. In contrast, Basel II does take into account the quality of the loan, so fundamentally, it’s a big improvement.
Keep in mind, however, that many of the problems we’ve seen around undercapitalized financial institutions were not driven by any regulatory capital model but rather by fundamental aggressive risk management and accompanying reserve judgment. Both capital models, Basel I and Basel II, are driven by historical context and, therefore, will never be completely accurate predictors of future needs. It’s imperative that the management teams of all financial institutions understand their risks and, as appropriate, set capital levels above the regulatory minimum. No model will ever be a substitute for conservative management — which includes a sound balance sheet and risk management.
Kashyap: According to Bloomberg, JPMorgan Chase’s write-downs during this credit cycle are $9.8 billion as of June 3. While large in absolute terms, these losses are small compared to those of some of your largest competitors. Will there be lasting changes in the way your bank operates as a result of this episode?
Parkhill: Yes. Financial services is a cyclical business and, as I mentioned with Basel I and Basel II, strong risk management is key to navigating well through the cycles. At JPMorgan Chase, we’re constantly focused on doing things better than we have in the past. Learning from this downturn and making lasting changes is no exception to that rule.
Currently, we have tightened our underwriting standards with mortgage and home equity loans, and improved our structures for leveraged loans. Thankfully, the changes we’ve needed to make can be categorized more in the “business-as-usual” or “constant-focus-on-improvement” bucket, as opposed to the “major-wholesale-changes-necessary-to-right-a-sinking-ship” bucket.
We have already made some changes and we will continue to make more as appropriate. However, like our competitors, we are not without risk in our balance sheet and we need to be continually and consciously aware of our risks.
Kashyap: The financial services industry looks risky as a career option for new MBAs. What will you tell someone about the prospects for new MBAs over the next year?
Parkhill: It’s no different than in any other downturn year. Strong leaders in the financial industry understand that our business is cyclical. Given that fact, we need to focus on managing and building a pipeline of talent through any cycle. Large firms will continue to recruit from the best business schools — and the GSB obviously tops that list. While the number of hires in a downturn is typically down slightly for any large firm, MBA recruiting is not an area in which to cut back significantly.
Kashyap: What do you see as the future of commercial banking in the United States? Will there be any more consolidation? Is the universal banking model dead? Do you expect any significant foreign entry? Will subprime lending come back?
Parkhill: I would start by saying that commercial banking focuses on providing some of the basic financial services — like loans, deposits, and other treasury services products — to middle market businesses. If run well and with strong risk management, commercial banking can be fundamentally less cyclical than some of the other financial services businesses, like investment banking. It’s also more of a steady growth business, closely in step with GDP. With that said, I do believe there will be more consolidation, particularly in the current environment, as the weaker players who need to raise equity capital to cover their ballooning credit reserves begin to have little or no other choice than to merge with or sell to some of the stronger players.
On the question of the universal banking model, I would say that that model is not dead, despite what folks may hear or read. I would argue that it’s not the model that is failing for some institutions, but rather the management. There exist natural synergies between retail banking, commercial banking, investment banking, asset management, and the credit card business. And while it’s difficult to harness those synergies within large institutions, it takes both strong leadership and great partnerships to make it happen. If you have those qualities, the universal banking model can be a huge success.
With regard to any significant foreign entry, commercial banking is fundamentally a local business. Middle market customers want to do business with a bank that has local decision makers and that understands and is committed to their community. Given that dynamic, it’s difficult for a European, Latin American, or Asian bank with little local brand clout to compete and gain market share in this mature business. While there will be more foreign entry, I believe it may take a different form than just some foreign bank setting up an office in Chicago; it will more likely take the form of an equity investment in existing local players who need to raise capital, or foreign banks buying existing players but maintaining the local brand name and decision-making power.
Regarding subprime lending, I definitely believe that it will come back, but in a far more disciplined fashion. As with any significant market correction, one would hope that we’ve learned from the mistakes of the past. Higher underwriting standards and greater transparency are imperative going forward. Fundamentally, subprime mortgages are a good product and serve a meaningful purpose: to help many realize the American dream of owning their own home.
