Since the early 1960s, the Federal Reserve Bank of Chicago's Conference on Bank Structure and Competition has served as a forum for academics, regulators, and industry participants to debate current issues affecting the financial services industry. The 41st annual conference included five panelists discussing the state of retail lending. The remarks of three of the panelists are included here.

Retail lending has changed from a business in which the banker knew the borrower and used traditional underwriting policies to one that uses risk-based pricing, off-balance-sheet transactions, and new products to maximize loan production. This wholesale change raises concerns about risk, a panel of experts told bankers at the Federal Reserve Bank of Chicago's recent conference on bank structure and competition. Among the panelists were Cathy Lemieux, senior vice president of the Chicago Fed; Mike Frow, executive vice president and chief risk officer for Harris Financial Corp., Chicago, a subsidiary of BMO Financial Group, Montreal; and Robert M. Tetenbaum, executive vice president, First Manhattan Consulting Group (FMCG), New York.

While expansion of credit to riskier borrowers has allowed more people to become homeowners, it also has meant that banks need to focus more on appropriate pricing and risk management, said the Chicago Fed's Cathy Lemieux. A week after Lemieux's comment, the five major bank regulatory agencies voiced similar concerns in a joint statement: "In many cases, the institutions' credit risk management practices for home equity lending have not kept pace with the product's rapid growth and easing of underwriting standards."

Retail lending, primarily mortgages and home equity credit, helped banks earn record profits, Lemieux said. This happened in spite of the decline in commercial lending that has occurred over the past 13 quarters. Home equity is the fastest-growing asset class on financial institutions' balance sheets, having increased nearly 45% between 2003 and 2004, while total bank assets grew less than 5%.

As retail lending has evolved, so too has the risk profile for retail lending, according to Lemieux. Outsourcing/indirect lending, securitization, credit scoring, technology, new products, risk-based pricing, and the movement of some risk to off-balance-sheet transactions have changed risk profiles at many banks. Strongly urging financial institutions to manage risk and compliance on an enterprise-wide basis, she recommended that banks develop broader, more discriminating, and more forward-looking management information systems for retail lending. "Don't be complacent about current asset quality," Lemieux said. "Stay on top of concentrations."

Though information technology can help banks mitigate risk, IT has its own risk issues as well, Lemieux said. She urged banks to "verify, verify, verify" the lending models some of these technologies provide. Credit-scoring models, for example, depend on accurate data at the beginning, strong information integrity, and accurate analysis of the data, Lemieux added. "A lot can go wrong. Technology and the Internet can result in magnification of glitches and external fraud."

Lemieux also cautioned bankers to be wary of new products, many of which are untested for operational risk in the current rising-rate environment. Operational risk also comes from the increased use of less-regulated, third-party firms, which may not be as careful in safeguarding customer information as the banks, she said. The third-party firm, the bank, and the customer will all suffer if the customer information is compromised.

In the post-Sarbanes-Oxley environment, proper accounting matters more than ever, Lemieux cautioned. Securitization makes the accounting process even more complex because the valuation of the mortgage-backed and other securities calls for some valuation judgments, which may not always be accurate.

"Option soup" needs more science than art. "From a risk management perspective, the increasing complexity of the [credit] 'option soup' and the trade-offs we make to achieve profitable growth, satisfy client demands, and meet shareholder expectations require us to evaluate both the art and science [of retail lending]," agreed Harris Bank's Mike Frow.

Retail lending itself has moved further from art and closer to science as technology, data, complex hedging, and increasing expansion of lending from a local business to a national--and even international--business have become more prevalent in the industry, Frow said. His own bank, for example, has been known in Chicago for many years as a local institution, but as part of the larger BMO organization. Harris now has international resources and the capabilities of the corporate technology, including credit scoring and data modeling.

Similarly, the consumer loan has gone from an unconditional promise to pay plus option to default, to a promise to pay with an increasing number of options--floors, caps, interest-only payments, rate locks, prepayment options, and more. Also, lenders making loans today require much less in actual principal repayment by offering interest-only loan options, so consumers have shifted from borrowing and repaying money to "renting" cash.

Dennis, a Category 3 hurricane, barrels toward the Florida Panhandle after lashing Cuba. With 125 mph sustained winds, the storm threatens to become to a ferocious Category 4, amazing experts with the speed at which it strengthens. In their view, Dennis bears terrifying resemblance to Ivan the Terrible, the $7 billion disaster that ransacked the Gulf Coast merely 10 months earlier. Authorities have instituted voluntary or mandatory evacuations for the more than 1.2 million people throughout the Gulf Coast.

The worst has happened. Dennis is now a Category 4 storm. Its maximum sustained winds reach 145 mph--with higher gusts. Storm surge is forecasted to peak at 19 feet. Isolated rainfall at landfall could total 15 inches. The modeling companies have estimated worst-case-scenario losses as high as $11 billion. The National Hurricane Center warns that the storm is "EXTREMELY DANGEROUS."

Noon CDT, Sunday, July 10

The National Hurricane Center reports, "Dangerous Hurricane Dennis within a few hours of landfall ... Preparations to protect life and property should already have been completed."

Early on Sunday, whether they were holed up in Jacksonville waiting out the storm, or monitoring it on their laptops in Bermuda, businesses owners, risk managers and insurers held their breath, prayed, crossed their fingers or did whatever it took to make themselves feel better. Dennis was coming, and he looked mean.

Meanwhile, Bud Trice, vice president and head of Crawford & Co.'s Catastrophe Services Group, aimed his forces right at the storm and pulled the trigger. From headquarters in Atlanta, he activated his PROACT team, an administrative and managerial support group that included experts on facilities, IT, HR, training, and compliance and licensing, to choreograph the effort. Trice prepped his PROACT team with questions on "what if, what if, what it"' for any eventuality that Dennis might throw at them.

Hundreds of adjusters were contacted and placed on standby. When Dennis neared, the decision was made to deploy them to a common location. PROACT targeted Mobile, Ala., for a temporary base of operations. About an hour's drive to the east, Pensacola, Fla., which appeared to be directly in the path of the storm, was chosen to be the site for the "Armageddon station."

PROACT leased the on-site space and sent 10 computers, high-speed scanners, fax and photocopy machines, the spare coffeemaker, and other office equipment and supplies from Atlanta headquarters to furnish Armageddon station.

To make sure his team would have the tools they needed no matter how flattened Pensacola ended up, Trice dispatched a satellite truck. Weighing in at more than 24,000 pounds, the truck was loaded with as many as 15 satellite phone lines, Internet access for as many as 256 users, 150 gallons of diesel and 100 amps of output, enough juice for a broadcast to the Atlanta headquarters and another feed if necessary.

All of this had to reach Mobile, Pensacola, Panama City, Apalachicola and all other affected communities as early and as safely possible. Otherwise, insurers could be left with thousands of claims--totaling billions of dollars--and no estimates. Business owners would be left with losses and no cheeks.

"You can't wait until the claims are piling up before you act," says Trice.

DENNIS JUST A MENACE

Within only hours of the coast, Dennis decelerated as the hurricane passed over cooler water and was weakened by its own thunderstorms. When the storm eventually made landfall at Santa Rosa Island, Fla., on Sunday at 2:30 p.m. CDT, its winds were sustained at a healthy 120 mph--still worthy of Category 3--but far less fearsome than the 145 mph-plus blasts that it packed earlier that morning. Moreover, Dennis was smallish compared to Ivan, and it moved fast through the area, unlike Ivan, which squatted on the area for 12 hours.

"Florida dodged a bullet," says Trice.

Dennis' eye swept over Pensacola, but the worst of it roared east of the city through sparsely populated lowlands and small Florida beach communities like Pace, Milton and Navarre. Whereas most major hurricanes tear a track 30 to 40 miles on either side where they make landfall, Dennis' swath was a mere 8 miles. As Trice put it, it was like a tornado had come through, without the severity of a tornado.

This turn of events seemed heaven-sent for most of the people who lived and worked in Pensacola. They had dodged Armageddon. Trice, on the other hand, had committed money, personnel and equipment to Pensacola the weekend before with the idea that it all would be needed during the weeks, possibly months, to come.

Instead, Trice found himself in Mobile, on Wednesday, July 13, standing before approximately 200 adjusters, telling them that at least half would have to go home. From what Trice had heard, actual numbers of insurance claims were only 20 percent of the predicted number, and these were trickling in slower than the drizzle from the gray clouds above. One client, for instance, notified Trice on Thursday that instead of the 40 adjusters it had requested earlier, it would now need only five.

Engaging the Whole of Service-Learning, Diversity, and Learning Communities Joseph A. Galura, Penny Pasque, David Schoem, and Jeffrey Howard (Eds.) Ann Arbor, MI: OCSL Press, 2004, 238 pages, $20 (softcover)

After reading the title of the book edited by Galura, Pasque, Schoem, and Howard-Engaging the Whole of Service-Learning, Diversity, and Learning Communities-a whole lot of questions arose: Is this yet another bandwagon book that simply argues that service-learning, diversity, and learning communities are good? Can a single edited book address these three often haphazardly used, but seldom carefully defined issues in a substantive manner? What are the interrelationships between these three ideas; should they be interconnected? Will readers think differently and more complexly about these issues after completing this text? The skepticism embedded in these questions arises from the historically glib and superficial treatment of these important matters. It is difficult to oppose diversity, service-learning, and learning community initiatives; yet it is equally difficult to define, educate, and invoke meaningful action around an integrated treatment of these topics. After reading Engaging the Whole of Service-Learning, Diversity, and Learning Communities in its entirety, a whole lot of thought-provoking and satisfying answers to these questions resulted.

The heart of the book is a comprehensive overview and analysis of the University of Michigan's Michigan Community Scholars Program (MCSP)-in particular its infrastructure, history, and culture. The contributors also address how this unique program responds to the University's desire to bolster its diversity, service-learning and learning community initiatives. MCSP, a voluntary residential on-campus community, brings together diverse students, faculty, staff, and local community activists for reflection, dialogue, and action by sponsoring interdisciplinary-based seminars (e.g., music, sustainability, and democracy topics), residential camaraderie, and numerous off-campus field experiences (e.g., service-learning outings). MCSP began as a small living-learning program that aided with the transition from high school to college and has become a nationally recognized living-learning program where students utilize what they learn in every aspect of the program.

The MCSP's four learning outcomes reveal much about the program's ideology and implementation strategies and are themes that dominate nearly every chapter in the book. The outcomes include: (a) deep learning (i.e., teachers and learners engaging with ideas), (b) an engaged community (i.e., a safe, accepting, and participatory scholarly community), (c) meaningful civic engagement and community service-learning (i.e., establishing long term reflection, leadership development, sustainable university-local community partnerships), and (d) diverse democracy, intercultural understanding, and dialogue (i.e., engaging in intercultural dialogue, valuing democracy, reflecting on social justice, and modeling good practice). The authors persuasively and persistently argue that higher education's future hinges on college curriculums (i.e., what goes on in the classroom) and cocurriculums (i.e., life outside the classroom) that focus on these three issues (i.e., service-learning, diversity, and learning communities) and four learning outcomes. More importantly, contributors argue that universities should interconnect these innovations to achieve a "synergism, which broadens and deepens our educational agenda" (p. iv).

The four editors divide this 21-chapter book (with 50 contributors) into four sections. Part I, "National Trends in Higher Education: Service-Learning, Diversity and Learning Communities," includes brief essays from five national scholars who provide theoretical overviews of and rationales for the reoccurring themes such as diversity, social justice, learning communities, leadership, service-learning, civic engagement/education, community-based teaching, and innovative leadership.

The remaining three sections favor practitioners, organized around a series of local case studies written by a wide range of MCSP stakeholders (e.g., students, faculty, program administrators, internship supervisors). Part II, "Innovative Program Models that Engage the Whole," provides an exhaustive overview of the MCSP's conceptual underpinnings, goals, practices, successes, and challenges-necessary context for the case studies that follow. Part III, "Integrative Course Models: Collaborations of Faculty, Students, Staff, and Community Partners," includes nine chapters replete with numerous examples of integrative seminar models where MCSP faculty members collaborate with students, community agencies and activists to design and implement innovative interdisciplinary learning. Part IV, "Integrative Course Models: Collaborations of Faculty, Students, Staff, and Community Partners," includes detailed practical models. These case study chapters, while repetitive and remarkably similar in content and focus, identify issues for discussion and analysis centering on curriculum and student learning. The final chapter provides description and an outline of the assessment tools MCSP uses for program evaluation.

Norman Rickeman is a partner and Allen Stiles is an associate partner in Andersen Consulting's Media & Entertainment Practice.

Only four years into the age of the Internet, there's no doubt that the advertising industry knows how to talk the talk about new media paradigms, interactive marketing and all things cyber. But can it walk the walk?

A new study alarmingly suggests that despite all the industry ferment over today's shifting media landscape, most traditional advertising agencies are still missing an enormous opportunity to stake their claims to the emerging world of electronic commerce. An Andersen Consulting survey in December, of 10 major ad firms, including both domestic and global full service agencies as well as technology-focused and direct marketing shops, attempted to gauge how advertising agencies are using information technology to respond to new media and consumer trends, especially with the rise of the Internet. The key finding: While most advertising agencies clearly recognize that new information technologies have become vital to better understanding consumer behavior, manage client services and facilitate internal agency operations, a surprisingly wide gap exists between most agencies' stated goals in these areas arid their actual implementation efforts.

While all the agencies surveyed agreed that consumers growing use of electronic services signifies an important shift in buying behavior and media usage, few are actually employing such information technologies as marketing databases, data mining or other consumer analysis tools to better understand either the dynamics of this new marketplace or the most effective means of communicating with consumers. Indeed, most online advertising is still restricted to banner ad branding efforts, despite the fact that new information tools exist to help make such ads far more targeted, interactive and transaction-oriented. It's one thing for online consumers to see a general image-oriented ad for Saturn automobiles, for example, but it would be quite another to see one that offered $1,000 cash-back from their own local Saturn dealership or a chance to test drive a vehicle conveniently delivered to their home or office.

Most ad agencies rated the use of such knowledge management tools a "high priority," but it is mostly only direct marketing firms that appear to be systematically using such tools in their campaigns. Moreover, such infotech "illiteracy" appears to predominate even among agencies with a strong client base in the retail and consumer product sectors, where the opportunities for brokering electronic commerce services are greatest. This suggests that many traditional ad firms still tend to view the Internet as just another passive ad medium, rather than a powerful two-way channel for learning about, and marketing to, consumers.

The advertising industry is in danger of missing a huge revenue stream. Unless agencies begin to deploy consumer analysis and marketing tools, and soon, the management of e-commerce services for consumer product companies could well be left to Web hosting firms, Internet access providers or even e-commerce systems vendors and others with little or no expertise in consumer-oriented marketing communications.

And it's not just client-oriented activities that appear to be suffering from the relatively sparing use of information technology. Our survey also spotlighted widespread infotech utilization weaknesses in the internal operations of most of the agencies surveyed:

* Most agencies rated better project and account management, integrated time reporting, client performance modeling and contract planning as "high priorities," yet infotech use to achieve these goals was lagging.

* Most agencies reported a high degree of centralized control of infotech functions, with relatively little coordination of functions with the needs of local agency offices.

* With the exception of direct marketing firms, the percentage of employees committed to infotech functions was far below the norms in other industries, such as insurance or banking. Many ad agencies still seem to view infotech as merely a "back office" issue-a burdensome "cost of doing business," if you will-rather than as a strategic weapon that can be leveraged to serve clients more effectively and gain competitive advantage.

But with the growing segmentation of media audiences, and the ever-greater challenges agencies face in understanding and reaching these audiences, the advertising industry ignores the strategic potential of information technology only at its peril.