Failures in banks’ risk controls have been under the spotlight again after an alleged rogue trader at UBS in London managed to hide his activities for years while causing losses estimated at over U$2bn to the Swiss bank.

Instead of ellaborating on the issue of financial risk management, Mr Ackermann focussed his speech on risks that he believes threaten the prospects of the European banking sector.

“The crisis has not only required a rethinking of the structure, method and practices or risk management,” he said. “More fundamentally, it led to a wide ranging review of the outlook for the financial industry as managers and investors reassess its long term prospects.”

Mr Ackermann attributed the ‘unusual’ volatility of bank share prices that has been observed this year to uncertainties about the future of the industry.

He noted that doubts about the US and European economies have reduced the options for banks to achieve solid rates of growth.

The high levels of debt in the developed world does not help either, as investors are not sure whether de-leveraging will be achieved by inflation or deflation.

“The financial sector has been badly clobbered,” he said. “The financial industry reacts very sensitively to political and macroeconomic news.”

But Mr Ackermann’s most pressing concerns relate to tougher regulatory regimes that should be imposed on the financial industry in forthcoming years.

He expressed worries about higher capital levels that are expected to be implemented by the Basel III regime, which, in his view, will simply limit the ability of the banks to provide adequate credit to the economy.

The banker also opposes proposals to ring-fence retail banking and investment banking activities of large banking groups, as currently discussed in the United Kingdom.

In his view, such measures are counter-productive because they will increase risk concentration and affect liquidity in the market.

“Changes in the regulatory framework are really necessary to address the financial market’s deficiencies,” said Mr Ackermann, who is also the head of the Institute of International Finance, a lobby group for the global banking industry.

“However, it is undeniable that all of these changes are coming to force very quickly, leaving little time for banks to adjust to the new world. The risk is that the cumulative effects of all these reforms will be massively negative,” said Mr Ackermann.

Mr Ackermann pointed out that the events of the past few years have created an opportunity for banks to pay more attention to systemic risks and to think about the wider consequences of their actions.

“It is of paramount importance for us to think about our activities in a more holistic manner going forward,” he said. “Financial institutions must think about the systemic risk and that includes social and political implications of their decisions,” he added.

The chairman of Deutsche Bank also pressed the point that a ‘tectonic shift’ is taking place in the global economy, with economic power moving towards emerging markets that enjoy better prospects of growth.

Although large banks like Deutsche Bank are taking advantage of the opportunities created in the emerging economies, they are facing tougher competition from rivals based in such markets, he said.

Mr Ackermann was particularly worried about the unwillingness of governments and regulators to follow Europe and the US and toughen up banking regulation because their financial systems were not as severely affected by the financial crisis.

In that case, European banks could find themselves at a competitive disadvantage compared to up-and-coming banks from the emerging world.

Mr Ackermann also noted that governments can help European banks remain healthy by seeking solutions to the sovereign debt crisis and not cause ‘undue harm’ with financial regulations.

He said that it is not correct to think of the debt crisis as a short term phenomenon linked to the financial crisis and exacerbated when governments decided to bail out the bans in several countries.

“Many have lived beyond their means for years, if not decades,” he said. “Failure to address fiscal problems will not only make life more difficult for the financial sector in Europe and the United State, it will also curtail the ability of societies with other challenges that they face, like ageing, education and environmental protection.”

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