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02 Oct 2012
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Can banks regain the people’s trust? And what exactly is the Basel III response? Dr. Philipp Hildebrand, former governor of the Swiss national bank until January 2012, attempted to answer these questions in the S.T.Lee Distinguished Annual Lecture organised by the LKY School.

Former governor of the Swiss national bank, Philip Hildebrand, talks about the future of banking, and the necessity of the Basel III.

Can banks regain the people’s trust? And what exactly is the Basel III response? Dr. Philipp Hildebrand, former governor of the Swiss national bank until January 2012, attempted to answer these questions in the S.T.Lee Distinguished Annual Lecture organised by the LKY School.

Hildebrand’s lecture was one in a series of lectures on banking and banking reforms, tackling the challenges surrounding the current global financial crisis. The former governor is also set to start lecturing this year at Oxford’s Blavatnik School of Government as a senior visiting fellow.


Regaining trust

With trust in banks severely damaged across the European continent and North America, Hildebrand emphasised the importance of having confidence in banks to bring prosperity to the world economy. Deploring the workings of the banking system before the crisis, Hildebrand said senior management in the banking sector must accept the logic of having risk-adjusted returns while also focus on activities where profitability is not the number one priority. Though this may not appeal to those within the banking sector, shareholders are beginning to accept the logic behind it, as they have realised that the previous paradigm simply did not work in the long term.

Hildebrand went on to state that regulatory change is essential as a lever that will change incentives for management and alter behaviour. Quoting the CEO of Citigroup, Vikram Pandit, he agreed that there are three essential questions before embarking on any business proceedings: whether it is in the client’s interest; has economic value, and is systemically responsible. Answered well, these questions probe leaders to initiate profound changes in the business world, he argued.

A paradigm shift is key to banks regaining the trust of the people. Following the Basel III accords, and enforcing regulatory measures, would be a start, he said. While not perfect, departing from the Basel III agreements would be what he called “a grave mistake”. What the banking sector now needs is augmented transparency, especially in the area of financial infrastructure. Also needed, he stated, is a change in culture. Though difficult to achieve, a change in culture is vital for the changes in the thought processes that are needed to move forward from the financial crisis.


A look at Basel III

In a more intimate lecture at the LKY School, chaired by Professor Charles Adams, Hildebrand addressed the issues of the Basel III regulatory standards that have been set up. The technicalities of it may be complicated, but they are important for the future of the banking system. Without regulatory measures that can aid the system to become less pro-cyclical, the world can expect to witness another financial crisis more devastating than the current one.

Reckless lending and excessive leverage in the financial system were factors in the crash that we are witnessing today. Basel III, the international accord amongst some of the most important financial centres of the world, aims to amend the wrongs entrenched in the prior banking system. The reforms were framed quickly to prevent another financial crisis.

The fundamental problem in Europe was that the banking and sovereign crises, while different, are deeply intertwined, Hildebrand observed. “The European crisis will be solved,” he said, “once the bond between sovereign funds and banks is broken”. What is needed however is to restore trust in the banking system.

According to Hildebrand, Central Banks face a threefold challenge: economic, intellectual, and institutional. It is important that banks receive more capital of better quality instead of relying on risky ventures; future capital must be more loss-absorbing than what was witnessed during the crisis. Systemic risks in the current banking system need to be addressed so that capital can act as a buffer in bad times.


Where do we go from here?

The internal risks built within meant the banks were unable to withstand the financial crisis of 2008. Hildebrand states it is in the world’s interest to ensure that trust does become reclaimed because economic prosperity is dependent upon it. Basel III reforms must be taken seriously, as without these, the world can expect to see dire consequences in terms of more crashes occurring. What is needed is systemic change and more transparency from our banking sectors. The world cannot move forward, then, without some immediate reforms on the part of our leading financial institutions, he said.


Meryl Haddad is a first-year MPP student studying at the LKY School. She graduated from the American University of Beirut in 2009 with a B.A in Political Science and worked as a freelance journalist before coming to Singapore to pursue a master’s degree. Her email is

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