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Published on April 11, 2008

Speaking to an audience of senior Thai bankers in Bangkok yesterday, Lafferty said there were lessons to be learned from the crisis, and banks here would be wise to avoid the conglomerate banking group model that has held sway across Europe and in the United States.

He declared that such banking groups - with an integrated structure combining investment banking, private banking, corporate banking and retail banking - would not be sustainable in future.

Rather, he said: "In a controlled manner, large universal banks must be deintegrated, with their investment-banking arms hived off into highly disciplined subsidiaries subject to stricter capital controls and more robust management."

He said the underlying cause of the current crisis was "the recurrent form of systemic risk brought into the global financial system by a toxic combination of investment banking and proprietary trading". Investment banks had proved serial offenders in creating unsustainable "houses of cards".

He pointed out that the activities of investment banks had involved huge levels of leverage. This was compounded when an investment bank operates within a large international conglomerate and uses resources from the commercial banking side to "gear up their gambles".

In a stinging criticism of the "casino trading mentality" inherent in investment banking as is typically practised today, Lafferty said personal aggrandisement lay behind much of the banks' culture and that relentless pressure for performance inevitably led to speculation and risk-taking.

Very few at the very top of the large banking conglomerates or universal banks fully comprehend the complex scale of risk being undertaken or have suitable risk management procedures in place, he said.

He added that Asia should ignore dangerous calls to create the regional equivalents of integrated universal banks, and segregate banking functions along lines that make soundness and stability a priority. Conglomerate structures pose huge conflicts of interest for bankers in serving their customers.

Instead, retail banks should operate independently with a focus on sound and ethical business practices, rather than provide a source of funds for the exploits of investment bankers. One thing that the crisis has proved is "no bank can risk the distrust of its depositors", Lafferty said.

Lafferty is a former banking correspondent of the Financial Times and later formed the Lafferty Group to provide research, intelligence and advisory services to banks and other providers of retail financial services worldwide.

The Nation