Failure Analysis: How Banks Can Turn Adversity Into Advantage
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What is failure analysis and why is it important for banks?
In this episode, we're exploring what banks can learn from failure, not just reacting to it, but systematically analyzing it to improve risk management. Our guest brings a unique perspective grounded in years of real estate investing and commercial real estate finance, where deals rarely fail for a single reason and outcomes often hinge on how risks interact over time. We'll discuss the concept of failure analysis: what it is, how it works. and why it's more than just a post mortem, and how techniques drawn from different fields can be applied to bank risk. From understanding shared patterns of breakdown across portfolios to better anticipating where things can go wrong, this conversation looks at how to move beyond hindsight to build stronger, more forward-looking risk practices and ultimately make better decisions before problems surface.
I'm Frank Devlin, and this is the ProStype Banking Strategies Podcast. We're here to inform you on the top trends, challenges, and opportunities in banking today. Formed from the merger of BAI and RMA, trusted organizations that have been supporting financial services leaders over a hundred years, ProSite is a leading non-lobbying connector of people and information with deep expertise in risk, fraud, compliance, and retail and commercial banking. Our purpose is to empower financial services leaders to strengthen and advance our industry through training and insights, as well as tools and resources like this podcast. Now I'd like to introduce our guest, Donald Sheets, a lecturer in real estate at the Harvard Graduate School of Design.
Donald also has two dozen years of leadership experience on Wall Street across several investment management firms. Welcome, Donald. Perhaps we could get started with you sharing a bit more about your background in real estate and real estate investing before we tackle failure analysis.
Absolutely, and uh this might make mom proud. My background's most been on the buy side in either private equity or hedge fund kind of platforms and strategies. In a bit of an atypical area of commercial real estate, got my teeth cut on restructurings and turnarounds kind of at the asset level, and then eventually morphed that into versus playing defense, playing offense, and building a couple business strategies around the acquisition of discounted commercial mortgage debt. And so what these platforms would do is acquire loans at discounts. from insurance companies or banks or special servicers or other investment funds. I had have a team in-house that could work these loans out and ultimately resolve them.
The kind of lens that informed a lot of my career on Wall Street was being able to look at business plans that obviously didn't quite work. I wouldn't say fully failed, but certainly on the spectrum of failure. didn't hit the mark and still be able to go long on those situations and What effectively emerged was the ability to do a fair amount of pattern analysis. And that really, when I think about the denominator of what my experience within CRE has been, has been able to identify patterns that either were mispriced or misunderstood by the market and afford our investment platforms the ability to find investment themes and ultimately resolve them profitably for our investors. As a result of that.
So it sounds like you've been doing something along the lines of failure analysis for a very long time, whether you classified it in that way.
Or really even realized it. Yes, exactly.
No so now you're teaching a course. Can you briefly define failure analysis, what it is, how it works, why it's important at a very sort of general level?
Absolutely. The idea of there being some class around this at the graduate level had been percolating with me probably for nearly ten years. And sometimes what in the kind of the creative process, what can be powerful is to kind of chew on something for a little while and then all of a sudden you probably have a bit of the aha of how it could crystallize into something. Despite two dozen plus years or so that I was working at these investment funds, I had been teaching on a clinical basis.
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Chapters
8 chapters
1
What is failure analysis and why is it important for banks?
0:00–5:48
2
How does Donald Sheets’ real‑estate background shape his view of risk?
5:48–10:14
3
What are the core steps of the “event analysis” framework?
10:14–15:06
4
How can banks turn post‑mortem insights into proactive risk tools?
15:06–19:19
5
What role do cognitive bias and language (failure vs. event) play in decision‑making?
19:19–24:17
6
How can failure analysis be applied beyond finance – e.g., sports, medicine, engineering?
24:17–27:34
7
What does a pre‑mortem (forward‑looking) analysis look like for credit decisions?
27:34–32:27
8
How can banks embed a continuous failure‑learning culture into everyday operations?
32:27–35:59
Speakers
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