The Principles of Banking

Chapter 16

Bank Strategy I: Formulating Strategy and Direction

The global financial crisis of 2007–2009 had the effect of making all participants in the banking industry, from regulators, central banks and governments to bank boards, directors and trade associations, undertake a fundamental review of the principles of banking. Issues such as capital and liquidity management, and systemic risk, became the subject of renewed focus. In practical terms, legislators realised that they needed to address the issue of the “too-big-to-fail” bank; this issue remains unresolved, and ultimately the realisation will dawn that the global economy simply cannot withstand certain financial institutions failing. But instead of this being taken to mean that banks can operate perpetually in an environment in which their profits are privatised and losses are socialised, it should be apparent that these institutions will have to be run on principles that ensure that they survive throughout the business cycle. This will call for more enlightened strategy and management, as well as an inherent conservatism. If bankers wish to run a proprietary trading outfit, or wish to maximise market share and return on capital, or outperform their peers, then they should go and work at a hedge fund. Those who manage a retail deposit-taking institution will need to remain aware of the responsibilities they bear.

From the point of view of bank practitioners, the most important task is to address the issues of capital, ...