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I must say, the last couple of years have felt like a lifetime. I never thought in my 30-plus years in banking that I would see such enormous changes as those that our industry has witnessed in the past 24 months. We’ve learnt some tough lessons: the risks in the banking system were greater, and more complex, than anything we imagined. The last estimate of the IMF for losses in the banking industry as a result of the financial crisis was $4 trillion; the banking system is more interconnected than we thought possible – in other words, systemic risk is much greater than we imagined; we have seen government intervention in both banks and markets that is unprecedented at any time since the 1930s; and the public’s trust in banking, and in bankers, has been profoundly shaken.
So, we are witnessing a paradigm change for our industry. Decisions taken over the next couple of years will influence banking for the next generation.
The question is: what form will the new paradigm take?
In my view, the lessons we have learnt in the past 24 months point us to some likely features of the new world order: the regulatory and supervisory framework will be tighter; it will be more coordinated and harmonized across different jurisdictions and regions; it will have to take account not just of individual bank risk but also of systemic risk; it will also need to take account of risks not only in the banking system, but also in the so-called shadow banking system; government and public opinion will play a much greater role; and last but not least, accounting and reserving policies will be extremely important in guarding against pro-cyclicality.