When Boston last hosted Sibos, Bear Stearns and Lehman Brothers were still in business and concerns about the US sub-prime mortgage crisis were only just beginning to assume wider significance for the global financial system. Returning seven years later, Sibos delegates will undoubtedly reflect on the nature of the global financial crisis, the regulatory response and the competitive challenges that lie ahead as the banking industry looks to find new ways to serve retail and institutional clients. Sibos 2014’s opening speaker, Jamie Forese, is particularly well placed to assess the state of wholesale banking. Appointed CEO of Citi’s institutional clients group in January 2013, New York-based Forese oversees a wide spread of businesses from markets and securities services to treasury and trade solutions, and from corporate and investment banking to private banking.</p> How have banks responded to the challenges of the post-crisis environment?</h4> Since the crisis, every large bank, and perhaps even every small bank too, has reviewed its strategy and for the most part decided to focus on the basics of banking and its own particular strengths. The age of trying to be all things to all people and growing in an unconstrained capacity are over. At Citi, we decided to simplify our structure and get smaller. In the process, we got much stronger and much safer.Having gone into a wide range of businesses, such as insurance and wealth management, we went back to operating two principal divisions, one serving individuals around the world and the other serving multinational corporations, financial institutions, and public sector entities around the world. Since making that strategic choice, we have made a tremendous amount of progress in establishing consistent profitability, while also improving our capital and liquidity levels.</p> Citi’s approach is in keeping with that of certain other large institutions. Is that leading to a more diverse and competitive post-crisis banking environment?</h4> The competitive landscape has certainly changed. We see domestic and regional banks becoming more competitive and perhaps some global banks retrenching and narrowing their focus. We compete with a different set of banks in every market, every geography and every product segment.</p> One of Citi’s strengths is the ‘globality’ we offer to clients. We maintain the 100-country footprint that we can use to our competitive advantage, but we don’t compete in the same segments in all of those countries. Many other global players are focusing on their core strengths and have decided not to expand as aggressively globally, so we don’t compete with every one of those firms in every market.</p> At the same time, we have seen the emergence and the strengthening of local players that are trying to become more prominent in their domestic and regional markets. Some global firms have de-emphasised Brazil, for example, but local competitors have got stronger, so the competitive landscape is shifting, but getting no easier.</p> Banks have also had to work to regain customer trust. What progress has been made and how much work remains?</h4> The reputation of the industry has suffered, without a doubt; respect was lost and trust was broken. We have been working hard to repair that damage, not just for our bank, but for the industry overall. We have been trying to prove the value that banks provide to the economy and the wider society.</p> We are starting to make a lot of progress, in part because we are getting the support of individuals and small businesses who are advocating the need for banks. But we have still some way to go in articulating and demonstrating that what happened leading up to the crisis is not the essence of the industry.</p> The pace, scope and invasiveness of regulation has been a major challenge for banks in recent years. We might agree with the overall aims of regulation, but are the rules themselves really helping us to reach those aims or are they falling short?</h4> In general, the regulatory and legislative proposals are all well-intended. They start from the premise of wanting to make the financial system safer, stronger and simpler. However, some of the detail in the proposals as they are currently written may not necessarily accomplish those principles as effectively as intended.</p> Sometimes the regulation overlaps, so there might be four regulatory proposals aiming to achieve the same thing where one will do. There are still elements of uncertainty: not all the rules have been finally written or implemented, so we still don’t know the ultimate effect on the business. There also needs to be coordination both amongst regulatory groups in the US, and between US regulators and those outside this country. That is improving, but still some of the goals of regulation – such as resolution planning – really do have to be coordinated globally to be effective. Due to the different legal vehicles in a multiplicity of countries, in order to effectively prepare and plan for a crisis in the future, there needs to be coordination amongst all parties.</p> We recognise that regulation needs to happen, and we would like to have a louder voice in helping to shape the future course of regulation. The financial industry has been discredited for the role that we played in the crisis, but we are genuine in wanting to fix the system – and have the experience and expertise to help find solutions. The crisis did a lot of damage to the economy, and a lot of damage to banks. No bank wants to see that history repeat itself. We’d like the regulatory and the legislative community to recognise that we want to be responsible participants in the re-regulation of the industry.</p> As well as the range of markets they operate in, how has the crisis changed how banks operate and organise themselves?</h4> There is no doubt that the attention being paid to the control environment has increased substantially. It is no longer just the responsibility of the various control functions, the entire management of the bank feels responsible for the control structure. It is not just left to the lawyers to consider legal issues or to the compliance department to consider compliance issues, the entire business bears a responsibility for legal risk, compliance risk and reputational risks and considerations. The sense of responsibility sharing is far greater. There has also been a big increase in the resources that banks have dedicated to the control structure. To manage the weight of that increased expense, banks have been looking at outsourcing opportunities and working with third parties where the industry can benefit from one party doing a task on behalf of many.</p> But there is a check and balance issue to be considered in order to maintain the same level of control as you would have in-house. Although the industry is more open to arrangements such as outsourcing, banks don’t want to lose accountability and prefer to take responsibility for certain elements.</p> What developments would be most welcome over the next couple of years to help banking get back to its core position in the economy?</h4> I’d certainly like to see greater harmonisation of the regulatory paradigms around the world. It is very challenging to meet multiple standards, rules and laws, especially as some conflict with others. For example, swaps reporting obligations in the US contradict client confidentiality rules in other countries. It’s a small example but it could lead to banks having to stop doing business in one jurisdiction because the two rules don’t reconcile.</p> I also think the industry would welcome final certainty on rules: there are a lot of rules being introduced and it is hard to know which ones are final and which are subject to further change. For example, we are operating under the Basel III risk weighted asset paradigm, but the supplemental leverage ratio has been increased and becomes the binding constraint, and there may be further adjustments to capital requirements. Moving the goal posts increases conservatism and uncertainty, and this by-product prevents banks from lending to firms and individuals and growing our business, which are the very things that regulation was designed to improve. In that context, banks would welcome more certainty on things such as the capital adequacy framework.</p> Also, we have been advocating for many years now that the regulators create a standard portfolio that every bank can run through their own internal models in advance of providing them to regulators for stress testing. Every bank has different asset compositions, but if we could all first run the same portfolio through our internal models, we could then calibrate to identify how and why different banks’ models give different answers. It would help us understand the regulators’ process, and that greater degree of transparency would really be welcome.</p>