Almost one decade on since the Great Financial Crisis, pressing questions linger about the banking industry’s state and prospects. In some important respects, notably capitalisation, banks are stronger than they were pre-crisis. Even so, there is widespread market scepticism about their strength and profit outlook. This reflects a poisonous mix of legacy problems and a hostile economic environment, notably persistently ultra-low interest rates. What can be done? Banks need to pursue sustainable profits, avoiding pre-crisis mistakes, by choosing the right business models; cost cutting and reductions of excess capacity are an inevitable part of the solution. Prudential authorities need to complete the financial reforms without delay, notably Basel III, to resist the pressure to dilute standards and to redouble efforts to repair balance sheets. Policymakers more generally need to work in concert with prudential supervisors to facilitate the necessary adjustment, not least by addressing the “exit problem” that characterises the industry and entrenches excess capacity.
The full speech is available here.