The UK Government has introduced the biggest reforms to the banking sector in a generation to make banks more resilient to shocks, easier to fix when they get into difficulties, and to reduce the severity of future financial crises.
The reforms aim in particular to reduce the impact on retail customers and the need for taxpayer bailouts when banks make losses.
Basel II failed precisely because it allowed banks to comply with the letter of the regulations while flouting its spirit. It is our view that good business is simple business; banks should aim for clarity and transparency in their dealings and above all to generate value for clients and their own business in equal proportions, whilst removing any non value-adds. If implemented well, such a strategy could more than offset the cost of compliance.
Sustaining competitive advantage will require a mind shift away from the short termism that led to the crisis, which cost banks their reputations and a whole lot more, to a more client-centric business model.
Next week: Part 2 - Background to the Crisis