On the day that the investment banking industry lurched closer to disaster following announcements from Wall Street, Bill Rhodes, Citibank chairman, told Sibos delegates that the worst could be yet to come, adding that "we are currently in the eye of the storm".
Warning that there will be "tough months ahead", Rhodes who was speaking as part of a panel of banking chiefs addressing the annual Swift conference, said "the US economy faces its greatest challenge since the end of World War II".
Rhodes told the audience that a build up of leverage, combined with low spreads and a lack of differentiation among borrowers had led to the current economic situation which today became even more dramatic following Bank of America's rescue of Merrill Lynch and the bankruptcy application of Lehman Brothers.
If it is to recover, the industry must adopt greater standardisation in regulation, accounting and banking systems, said Rhodes. "There needs to be an even playing field. It has been talked about for a long time but it has not happened yet."
Fellow panellist David Hodgkinson, group chief operating officer for HSBC, added that there were plenty of lessons to be learned from recent events, particularly as regards risk management. "Credit risk must be priced properly," he said, even though this may lead to a reduction in profit.
As well as calling for more independence for the risk function, Hodgkinson also pushed for an enterprise-wide approach to risk, a concept long promoted by various risk vendors. "Stress testing and quantitative analysis is not enough. Risk has to be looked at in an holistic context. It must be linked."
The panel, completed by Willeim Buiter, London School of Economics, and Gertrude Tumpel-Gugerell of the European Central Bank, suggested that the industry may see a return to more plain vanilla banking after the systemic risk caused by highly leveraged, over-the-counter instruments that were overly complex and not fully understood by all those that entered into such transactions.
"The leverage model of banking is broken, that is the problem," said Hodgkinson. "Asset prices will have to be stable and there will have to be a return to simpler, transparent instruments."
In a remark that would have pleased Swift and its ambitions to promote greater operational harmony among banks, Hodgkinson added that the industry "must simplify and standardise".
International regulators did not escape blame, with Hodgkinson suggesting that investment banks should face the same regulatory scrutiny as retail banks and Rhodes calling for greater understanding between regulators and those that they regulate. "We do not want to see innovation kileld as it is necessary for the financial system but it must be proper, prudent and transparent," he said.