What lies ahead?

“If you had the Olympian power – or a magic wand – what single big change would you make to the banking industry?”

That was the test set by Institute Chief Executive SIMON THOMPSON when he chaired the recent Future of Banking Workshop at the University of Edinburgh’s Business School. Here’s how the four members of the Workshop Panel rose to the challenge.

PAUL RICH
How much will everyone pay for stability?

For me, the critical objective is to secure the stability of the financial system. The trouble is that history does repeat itself. People forget. Having experienced this unprecedented turmoil in financial services, there’s now almost a public expectation that banks won’t fail, that somehow we have financial institutions that are so significant they can’t be allowed to fail and that the government simply has to step in.

This public perception could leave us prone to instability: the danger is that bankers themselves believe they can take a one-way risk bet knowing that there’s a bail-out behind them. So it is crucial that we learn the lessons of this crisis and make appropriate changes so that globally financial institutions are in a better position to face the next one when it happens.

Even if they try to have better risk-management standards – and that’s what all the regulations are about – the danger is that, as the economic cycle turns again, and credit looks good again, and there’s cheap money on the wholesale markets once more, people will forget.

So I’d turn the question back to the public and ask: how much are you prepared to pay to achieve stability in the financial system? If we want a diversified banking sector that does service its customers, then, as customers, you have to pay for that. And in the same way, I’d ask the bankers: how much capital stability does your bank have to equip itself with to pay for its own mistakes and not have to rely on the taxpayers to stand behind you?
PAUL RICH Manager, Banking Standards, Prudential Policy Division, FSA

KERRY FALCONER
“We’ve given people permission to be cynical”

All bankers want to get close to their clients. My dream is to get back to a place where trust is central to that relationship. In the last two years we’ve given all of our customers permission to be cynical about banking. It’s become fashionable to be negative about bankers. If you’ve ever tried to grab a cab in the City and they know you’re a banker, it’s not a very pleasant experience.

I want to end this mood and get people to take banking seriously again. Loyalty is something that all banks value greatly and – amazingly – it’s still there. But recent events have made clients much more financially savvy. They’re asking questions they’d never have thought of asking before because the world has changed so much.

We hear a lot about irresponsible lending, but I have yet to meet a banker who’d lend money that they didn’t think was going to be repaid. As a practicing banker, I simply can’t understand why anyone would do that.

At the end of the day, banks are commercial organisations, answerable to their shareholders. We’re expected to make a profit and we can only do that by lending sensibly and attracting deposits to fund that lending. So that’s my goal – to get back to a place where we can have less of a dysfunctional relationship.
KERRY FALCONER Head of Banking, Adam & Company 

KAY BLAIR
“Consumers need to force a change of culture.”

My hope is that increased regulation will help banking consumers. We’re very enthused by the FSA’s much more intrusive supervision. That’s really required. It’s not so long ago that consumers looked on banks as revered institutions that would recognise their needs and would value them.

Now, there’s a huge disenchantment. Customers have lost faith in banking and they need that trust restored. They need to believe that when the banks promise they’ll be treated fairly, it isn’t just rhetoric. I would instil a culture that’s genuinely customer driven rather than sales and product driven.

It’s unfortunate there’s been so little effective competition in this market. In other retail markets, new innovators have driven down costs, but in this market most of the major players, apart from Santander, are broadly the same firms – albeit merged – that were around a century ago.

I hope that customer demand will be one of the major drivers forcing culture change and reforming banking practices. It’s probably good news that new entrants like Virgin and Tesco are coming, although I question whether their business models will be any different from what we have now. But wouldn’t it be just great if Metro Bank’s slogan – ‘Love your bank!’ – applied to banking in general?
KAY BLAIR Vice-chair, Financial Services Consumer Panel

Dr PETER MOLES
“Banking’s cross-roads: utility or supermarket?”

Historically, banking has very successfully driven the economic engine, providing credit for industrial innovation. But it’s an old industry with two diametrically opposed positions: as a utility and as an intermediary in the management of risk.  Until recently, most depositors didn’t question the interaction of these two roles. They’ve simply taken it as a given that, somehow or other, banks have been doing this fantastic job of turning risky assets into safe liabilities.

I’d echo Walter Wriston, a former and very successful chairman and chief executive of Citibank: ‘The business of banking is risk’. That’s what we need to focus on – gaining a more fundamental understanding of the real complexities of risk.

We’ve come to rely too much on the technocratic management of risk. There’s been too much focus on trees and not enough on the wood: look at the huge difference between the first global standard of regulation Basel 1, which was principle-based, and Basel 2 which relies on a complex of mechanisms whose interaction no-one has actually tested.

If you look at banking purely as a utility for moving money around, that’s different from seeing it as client-driven like any other supermarket.

And so we return to a fundamental principle: what should banking do? Should its function purely be the distribution of money or should it be client-driven operating akin to a supermarket? A clear focus would be a significant move for the industry.
Dr PETER MOLES Senior Lecturer in Finance, the University of Edinburgh’s Business School

The Future of Banking took place in February and was held jointly by CIOBS, Women in Banking & Finance and the University of Edinburgh’s Business School.

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