Only six months later, in September 2008, three of Wall Street’s top five investment banks had disappeared as independent entities, and other two changed their operating status. Citigroup acquired Wachovia, Merrill Lynch went to Bank of America, Nomura took over Lehman Brothers’ operation in Europe and Asia-pacific, and Washington Mutual was bought by JP Morgan. Not to mention the nationalisation of Northern Rock, Bradford & Bingley, and the forced marriage of HBOS and Lloyds TSB in the UK. What went wrong? The short answer: A long period of rapid growth, low inflation, low interest rates and macroeconomic stability bred complacency and increased willingness to take unmanageable risk. Stability led to instability. Unchecked innovation – securitisation, off-balance-sheet financing and the rest – has, as always, proved a big part of the play.

These are dramatic times for banks. But it is not too early to ask: how can banks avoid such crises in the future? What are the lessons for banks? What are the banking models of the future? What are the lessons for governments? We believe, the lessons of the crisis, have less to do with rigid regulation than with the need for better leadership, superior operating strategy and prudent management.

It is up to the senior executives of banks to learn, or perhaps relearn, some time-honoured lessons. First, profits matter more than revenues. Second, compensation of executives should be based on profits, margins and return on equity over time, not current year revenues. Third, leverage works not just on the upside but on the downside as well. Excessive debt can turbo-charge profits during a boom, but can result in crippling losses when the bubbles burst. Fourth, diversified and recurring revenue streams not based on trading or principal investing have immense value in a down cycle. Fifth, risk management should become a board-level responsibility, with appropriate committees meeting regularly with management. Finally, globalisation of financial world has also created a clash of philosophies. Most governments and investors outside the USA are unlikely to share the American system of capitalism now. And they have good reason to demand that some fundamental changes be made in the way the USA manages its financial institutions. The existing global institutional apparatus is woefully incapable of overseeing the financial system that is evolving and becoming truly global. The G7 leading industrial countries lack legitimacy in today’s world where China, India, and others are major players, and where the International Monetary Fund (IMF) has no operational role. Even if the USA’s massive financial rescue operation succeeds, it should be followed by something even more far-reaching – the establishment of a Global Monetary Authority to oversee markets that have become borderless.

We believe that successful banks will need to respond to a range of trends in the 21st century, including:
• Evolving organisational models, separating manufacturing from sales and distribution and redefining the value chain.

• Redefinition of the banking value chain to identify opportunities and challenges from the recent structural changes and emergence of specialist players (such as, boutique investment management advisory services), particularly in product manufacturing and distribution.

• Adoption of segment-aligned operating models to provide differentiated levels of service to each customer segment, depending on its needs and value to the bank. Service differentiation by segment is important to halting cross-subsidisation of less profitable customers and profit leakage from the most profitable ones.

• Industry convergence and market structure shifts, which have positioned banks around customer results; the redefinition of the banking business; overcapacity and consolidation on a global, regional, and local scale.

• Transition from product-focused to customer-focused organisation that offer custom-made value propositions and high-quality customer service across all channels. The current barriers caused by traditional product silos limit banks’ ability to own the customer relationship and maximise revenue/profit opportunities. Banks must improve their service to customers, without imposing additional strain on the business model through redundant systems and costs.

• Extract superior value from the operations, processing and technology environments, recognising technology as a driver of industrialisation, which has an impact on innovation and scale, and which unbundles manufacturing and distribution.

For nearly a decade, we have partnered with many of the world’s leading banks and financial institutions, helped them navigate tough times and address operational transformation and technology issues that matter. Our consultants have worked on strategic engagements covering pre-merger IT due diligence, capturing post-merger integration benefits, crafting IT strategies, pioneering strategic sourcing that reduces risk and captures value for banks, and reducing operating costs by IT infrastructure virtualisation, to deliver lasting results. Difficult times need serious advisors – and banks come to Centrix when times are tough and difficult decisions are to be made.