The future of banking: Banking's next top model
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The future of banking: Banking's next top model

Bank business models have to change. Capital requirements will be higher. Leverage and risk will be lower. But there is a danger that regulators will try to make the system too safe. That’s if they ever manage to coordinate their actions. In the meantime, bank leaders are trying to find the best model for their own institutions, while managing the fallout from the credit crunch and second-guessing the lawmakers. Peter Lee reports.

DOUGLAS FLINT, GROUP finance director of HSBC Holdings, recounts some pressing and difficult questions from investors during the bank’s large capital-raising in the first quarter of 2009. These concerned not the bank’s large problem ABS exposure, not the prospect of rising losses on more conventional loans, but rather a new source of huge uncertainty for the banking industry. "Some of the most intelligent were saying, ‘We know regulation will be much more intense and intrusive for banks. We think there may be changes to the geographic range of banks’ businesses, to what products you will be allowed to deal in and how much capital you will have to put against them... but we don’t know what any of these changes will be. Why on earth should we invest in banks against this backdrop?’ "

The time is fast approaching when bank regulators and governments must declare how much more capital the banking system must raise. Its potential providers must decide what return they can accept for providing it and by implication what costs banks’ customers must pay.

If investors don’t like the answers they get, then governments might end up owning large portions of the banking system for a lot longer than they expected.

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