The banking industry is entering 2010 in better shape than last year, but much rebuilding remains to be done.

Financial institutions still need to figure out how to cope with distressed assets that remain on their balance sheets, and with new regulations that are expected to emerge. They need to address widespread demand for strengthened risk controls, and the ever-present challenge of managing gargantuan technology systems. And all the while, they will feel pressure to grow in an environment that — outside of government-assisted deals for seized institutions — may not be all that conducive to growth.

Those are the issues that Jim Reichbach, national industry leader for the U.S. banking and finance practice at Deloitte LLP, and his team have identified as the industry's most pressing for 2010. Reichbach, who has worked with financial services companies around the world for nearly two decades at Deloitte, discussed his expectations for the new year with American Banker. The following is a condensed version of the interview.

First, how did 2009 shape your expectations for 2010?
JIM REICHBACH: In that Dickens novel, it was the best of times, it was the worst of times. That's how 2009 was for banks, but maybe in reverse order.

In the beginning of the year we were in a very perilous position. Now we can say we've stepped back from the abyss and the industry is starting to recover. But while we are in a much better place than we were, there is much that will continue to need to be repaired going into 2010.

There are still banks with weak balance sheets, and strength of the balance sheet is and will be a first-and-foremost priority for bankers and for regulators.

Are banks ready yet to unload the "toxic" assets that are still on their books?
REICHBACH: Clearly banks will continue to work through the FDIC [resolution] process.

The big question is what it will take, or what will happen, for weak but surviving institutions that need to dispose of assets on their own.

The reality is that the bid-ask price spread is still large, and it's going to have to narrow on both sides.

Everyone was predicting major change on the regulatory front, but so far few concrete changes have been made. Is it time to recalibrate the expectations?
REICHBACH: Regulatory reform is coming.

Health care is working its way through Congress, and that was the legislation that was blocking movement on financial reform. The pipeline in Washington is only so big. When health care is done, financial regulation is next.

We're going to see some sort of consumer protection authority, and I think we're going to see new resolution authority for large financial institutions. As politics are wont to be, some of it will be watered down, but I think it will be there.

The wild card is the Senate, and [Senate Banking Chairman Chris] Dodd's proposals, which were certainly much more rigorous than the administration's or the House's.

The other wild card is a reinstituted version of [the] Glass-Steagall [Act], which some people handicap as really being something that gets debated.

You've highlighted risk management and corporate governance. Those were supposed to be the big issues for 2009, too. Has the industry made any progress there?
REICHBACH: I think it has. Boards, if they weren't before, are paying a lot more attention to things now in terms of governance processes, charters, education. We've been asked to get involved with boards to [help them] do those kinds of things. And the regulators are pushing very hard.

The piece I think is most interesting is the connection between risk management or board governance and infrastructure and information. The analytics that support risk management are getting fairly significant investments in institutions, either because regulators are demanding it or management has recognized it needs to get fixed.

The silo nature of infrastructure, created as banks have grown, needs to be broken down.

Does that come down to a matter of technology spending?
REICHBACH: It's primarily technology investments at the end of the day, but on top of that it's business processes and policies.

A lot of institutions through mergers have multiple pieces of technology that support different businesses, and sometimes one business is supported by several different pieces of technology. Collapsing all that technology and then creating the right analytical tools is not trivial, but it's the underpinning for an enterprise risk management view, and there are institutions now that are teeing up projects [costing in the] hundreds of millions of dollars.

Perhaps that is one way to squeeze more growth out of a slow environment?
REICHBACH: Yes, and the other side of that is true operating performance. If it's going to be tough to grow in a slow-growth market and a slow economy, then it's going to be really important to run yourself tight and lean.

What else should bankers be thinking about?
REICHBACH: One bank executive I talked to recently posed a question: As we move into the new year, will some boards recognize that their business model isn't sustainable, and as the Troubled Asset Relief Program starts getting paid back, does that pull away a safety net that will cause banks to sell themselves? If you're a small bank in Georgia and you have a pretty poor balance sheet, you're doing everything you can right now to address that, including at some point maybe selling yourself.

Should banks in slow markets think about diversifying geographically? That strategy did not work out very well for many institutions last time around.

REICHBACH: National banking models work. It's a question of the management of those institutions.

Wachovia got in trouble after they bought the Golden West brand. Wachovia was a well-run institution up until that transaction. It didn't matter if you were a small regional or a big national — if you made bad decisions, either in expanding or in lending, you were in trouble.

Bottom line, are you encouraged or discouraged for 2010?
REICHBACH: I'm hopeful. Maybe that's partly due to the juxtaposition between where we were a year ago and where we are now.

If in 2009 we cleared up many of the really fundamental questions about survival, 2010 will be a year that clarifies the regulatory framework and the economic environment overall.

It's going to be another important year.