Looking ahead to the open waters, firms must ensure that they are prepared  Page 8  and well-equipped to face the challenges that lurk therein. Have banks fully considered their changing role in this new world defined by changing macroeconomic conditions, increasing digitalisation and climate change? The better they are able to understand that environment, the better they will be able to adapt. And do not get me wrong, there are some remarkable opportunities for investment banks in that new world. But seizing those will require honest introspection, hard work, and at times completely rethinking their future role in society. I also want to use this opportunity to emphasise that it is the role of the independent boards to kick those tyres and ask those tough (and sometimes existential) questions. How nimble and flexible is the current business model and cost base of the firm? What is the firm’s raison d’être and franchise in the new environment? Is the firm sufficiently prepared to react to different scenarios that might play out? The future won't accept excuses – now is the time to take action. Because although you might feel you have been doing well in the swimming pool, once you are in open waters you’d better truly be a good swimmer. I would like to thank Orfhlaith Sheehy, John Mears, Fatima Abukar, Chris Forster, Simon Stockwell, David Brighton and Kate Jewkes for their assistance in preparing these remarks. 1. Global Banks’ $ Billion Haul Marks Most Profitable Year Ever - Bloomberg 2.
Firms’ management and boards should ensure that in credit assessments equal focus is placed on the liquidity profile of their clients as on their capital strength. Right-way risk is only right-way if a client is still standing when the hedge matures. Investment banks must bear in mind that their positions can play an important role in the functioning of the economy. Whilst it might be good risk management to reduce a client’s exposures when it suffers cash flow stresses from margin calls, was it good risk management for the bank to sleepwalk into that position in the first place? Working with the client to understand and anticipate all possible future outcomes, and access to facilities in order to meet liquidity demands in a stress, should surely be at the cornerstone of a client-centric business. It is important here for banks to think a few steps ahead and have in mind the potential indirect second-round effect of their counterparty management practices – some of which can otherwise  Page 5  come back to hit them. One other common feature of periods of stress has sometimes been the inadequacy of initial margins required by investment banks over the counter. The spike in nickel markets in March 2022 reminded everyone that progress needs to be made here. And while CCPs have lessons to learn, so do banks. When they undercook initial margins in benign times, banks give their clients the illusion that some products – for example hedges – are cheaper than they really should be economically.