Howard Davies explained the turbulence experienced by banks in the US and EU, particularly, the collapse of Silicon Valley Bank and Credit Suisse. Davies is also the chairman of the Advisory Council of the Chinese Regulatory Authorities, head of public policy at Standard Life Aberdeen and the first founding chairman of the Financial Services Authority in the UK which was formally divided into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) of the Bank of England in 2013.

He described Credit Suisse’s business model as having been fundamentally unviable and likely to fail eventually, saying: “Credit Suisse was in a place where no one else was and where no one in this room would wish to be with. It had very vulnerable deposits and a very low return on equity.”

The Bank of England and the European Central Bank had intervened quickly enough to avert contagion. These incidents have prompted a reevaluation of liquidity rules, capital requirements, deposit protection arrangements, and recovery and resolution regimes.

He presented the market capitalisation growth of US and Canadian banks, and the decline of European banks, and said that while the asset growth of Asian banks has been impressive, market appreciation has not kept pace. He added that Canadian banks, “the unsung heroes of the last 15 years”, performed exceptionally well on asset basis.

He raised concerns over the prevalence of banking fraud in the UK, and the “promiscuous” nature of users. Agile and innovative startups have rapidly grown their customer base, challenging the loyalty of traditional bank customers. He said neobanks and fintechs like Revolut and Monzo have taken on vast numbers of customers, who wanted to try new banking services.

Davies also pointed to the emergence of blockchain technology as a potential game-changer for the financial industry. Though cryptocurrencies are still finding their place, blockchain’s potential for secure and transparent transactions has captured the attention of banks worldwide. However, banks must carefully assess the role of cryptocurrencies in their business models and navigate regulatory uncertainties surrounding them, he said.

He also highlighted the transformative potential of artificial intelligence (AI). Accenture estimates that 54% of banking functions could be replaced by AI. Davies cautioned that while AI brings opportunities, bankers must think about defensive measures, and that the industry would be wrestling with technology risks and fraud.

He said: “There are huge potential productivity gains in a lot of customer-facing activity. But that is also a threat to the business model because if you don’t get ahead of it, then you could be facing competitors who have a massive productivity advantage over you.”

The rise of neobanks, fintechs, blockchain, cryptocurrencies, and AI presents both challenges and opportunities for traditional banks. On one hand, they face fierce competition from nimble startups offering innovative services, while on the other, embracing technological advancements and partnership opportunities can propel traditional banks to remain relevant in the digital age.

As the fraud risk from AI gains prominence, financial regulators are grappling with new challenges. Striking the right balance between fostering innovation and safeguarding stability remains a conundrum. Clear and adaptable regulations are crucial to promote a healthy fintech ecosystem and protect consumers.

Davies highlighted three ways to respond to AI in the industry, saying: “Take the advantages of it, try to ensure that we are appropriately competitive, and lastly, address the defense part of it because the opportunities for fraudsters to use AI are absolutely massive.”

He concluded: “I don't think we're facing a systemic crisis, as a result of the failures in the US and Europe.”