Howard Davies: Banking in the age of technological disruptions and regulatory challenges

Howard Davies played an instrumental role in the rehabilitation of the once-beleaguered Royal Bank of Scotland Group. It was bailed out by the British government at the depth of the global financial crisis. Under his stewardship, it was rebranded as NatWest Group in 2020 as it began to revitalise its core businesses and dedicate itself to its customers in the United Kingdom (UK).

Beyond transforming NatWest Group, Davies also influences policy discourse and development in the global financial industry through the six books on the economy and finance he has authored, and his boardroom presence around the world. He has been a member of the international advisory council of the China Banking and Insurance Regulatory Commission since 2003 and has chaired the international advisory council of the China Securities Regulatory Commission since 2012.

However, he is a bank regulator at the core, and was one before he became a banker. He served as deputy governor of the Bank of England (BoE) between 1995 and 1997 and was subsequently appointed as the first chairman of the newly set up Financial Services Authority (FSA) between 1997 and 2003.

He then became the director of the London School of Economics and Political Science (LSE) from 2003 to 2011, during which he actively supported its collaboration with leading foreign universities. Today, the group includes University of California, Berkeley, United States (US); University of Cape Town, South Africa; Columbia University, New York, US; Fudan University, Shanghai, China; Peking University, Beijing, China; French School of Political Science in Paris (Sciences Po), France; and the National University of Singapore.

He is also currently a professor of practice at Sciences Po, teaching courses in banking regulation and central banking, making him a relevant and important authority on global economics, finance and regulation.

He is the International Keynote Speaker at The Asian Banker Future of Finance Summit to be held in Bangkok on 14 June.

Leadership of NatWest Group

As chairman of NatWest Group since 2015, Davies has guided the bank through a transformative journey. Leveraging his extensive experience and expertise in the industry, he plays a central role together with CEO Alison Rose in leading the bank’s strategic direction, focusing on resilience and rebuilding its reputation.

Davies’ deep understanding of the causes of the global financial crisis, as discussed in his book The Financial Crisis: Who is to Blame? (2010), has informed his approach to risk management, governance, and sustainable growth within the bank.

His transformative leadership at NatWest Group has been marked by his vision and unwavering commitment to rebuilding the bank’s strengths. Drawing from his comprehensive understanding of the global financial crisis, he identified the underlying challenges faced by the bank and implemented measures to address them.

Davies’ polymathic approach and prodigious insight have been instrumental in reshaping NatWest Group’s strategy, culture, and operations, positioning it for long-term growth and sustainability.

Rebranding as NatWest Group

Under Davies’ guidance, NatWest Group underwent a significant rebranding in February 2020. Building on his knowledge of the UK Treasury’s role during the financial crisis,  Davies recognised the importance of repositioning the bank and aligning its brand with its subsidiary, NatWest. This strategic rebranding emphasised the bank’s commitment to rebuilding its reputation, strengthening its customer focus, and reflecting its purpose.

NatWest Group embraced a new mission of becoming a purpose-led bank. This mission, focused on the interests of customers, colleagues, communities, and shareholders, has guided the bank’s transformation. Drawing on his research on different regulatory frameworks, as outlined in his book  Global Financial Regulation: The Essential Guide (2008), Davies ensured that the bank prioritised sound risk management and regulatory compliance.

Under his leadership, NatWest Group achieved significant milestones, such as advancements in sustainable finance, diversity and inclusion initiatives, and digital innovation.

Perhaps the most notable is the significant reduction of the government’s stake in NatWest Group, falling from 53% to 46% during the course of 2022. This went even further to under 40% with the government’s recent sale of a GBP 1.26 billion ($1.56 billion) stake in May 2023. The British government had held up to 84% of the group as the result of an emergency bail-out in 2008. This achievement signifies the bank’s progress towards regaining private ownership and control over its direction, enabling greater agility and decision-making independence.

Current developments in the financial services industry

Davies’ books, including Banking on the Future: The Fall and Rise of Central Banking (2010), delivers his perspectives on the evolving financial services industry. He acknowledges the impact of technological advancements such as digital banking and fintech innovations on customer expectations and operational efficiency. He recognises the increasing significance of sustainability, and environmental, social and governance factors, and believes that responsible banking practices will be integral to the industry’s future.

In a recent interview with The Asian Banker, Davies shared his insights and views on the future of finance in an increasingly digital world. He highlighted the disruptive potential of new technologies, such as artificial intelligence, blockchain, the cloud, central bank digital currencies, Web3.0 and the metaverse.

Davies acknowledged that while these technologies have the potential to revolutionise the industry, their impact is still unfolding. He stressed the need for adaptation and cautioned against overlooking the importance of risk management and governance in the face of technological advancements.

Drawing from his extensive knowledge as an author, including his latest book The Chancellors: Steering the British Economy in Crisis Times (2022), Davies offered nuanced perspectives on the industry’s progression and the role of technology in shaping its future.

Commenting on the turbulence caused by ongoing geopolitical conflict and deglobalisation, Davies emphasised that financial institutions cannot solve these conflicts alone. He advised banks and insurers to focus on their core strengths and identify sustainable competitive advantages in niches while respecting the constraints imposed by politics. He said that while these recommendations might seem lacking in ambition, it was important to acknowledge forces stronger than financialisation.

When addressing the major threats posed by climate change to global economic growth and the world order, Davies emphasised the urgency of the issue. He closed in on the increased incidence of extreme weather events, the potential enormous costs of energy transmission, and the security and political implications of climate change-induced migration. Davies underscored the role of the financial industry, saying that while some lending may become unviable and impose losses on banks, there will also be significant investment and financing needs as new energy sources emerge. He called for stronger government action to transform this challenge into an opportunity.

Reflecting on recent banking liquidity crises and failures, Davies differentiated between the collapse of community and regional banks in the US and the failure of Swiss private bank, Credit Suisse. He noted that the regional banks were caught off guard by the sharp rise in US interest rates, revealing unhedged risks and triggering a rapid bank run. He criticised the poor supervision of these banks by regulatory authorities.

In contrast, the failure of Credit Suisse was attributed to the bank’s inability to convince investors of its viable business model, leading to the erosion of client trust. Davies said that a bank with an unsustainable business model will not survive indefinitely, and investors’ perception of credibility is crucial.

As for using taxpayer money to bail out at-risk banks, Davies expressed his concerns, arguing that while bankers may not intentionally take excessive risks with the expectation of a bailout, blanket protection of depositors can mute market signals and undermine the role of market discipline in preventing systemic risks.

He cautioned against the direction of moving towards absolute depositor protection and said that market signals were important for providing early warnings of trouble. Davies encouraged regulators to strike a balance between maintaining financial stability and avoiding moral hazard, noting that blanket protection of depositors could potentially create more issues in the future.

Davies’ views reflect his deep understanding of the financial landscape and his measured approach to the challenges and opportunities that lie ahead. His perspectives emphasise the need for adaptability, responsible governance, and strategic decision-making to navigate the dynamic and disruptive forces shaping the financial services industry.

Views on financial regulation and framework

Davies spent most of his early career from the start of the 1970s to mid-1980s in public service in the UK, where he developed an intimate understanding and knowledge of the inner workings of the government, especially the Treasury. Apart from a short period at the Foreign and Commonwealth Office in London, he served mainly at the Treasury in between stints to pursue a Master of Science in Management Science at Stanford University in the US and consulting at Mckinsey and Company.

On his return to public service in the mid-1980s, he was appointed as the special advisor to the Chancellor of the Exchequer. From 1987 to 1992 he was controller of the Audit Commission. In 1992, he was appointed director general of the Confederation of British Industry, before his appointments at BoE and FSA.

As the deputy governor of the BoE between 1995 and 1997, he played a pivotal role in shaping monetary policy, financial stability, and regulatory frameworks. His experience at the central bank gave him an in-depth understanding of the intricacies of macroeconomics, monetary policy implementation, and the functioning of financial systems.

His role as the first chairman of the newly formed FSA, the UK’s unified financial regulatory body, between 1997 and 2003 further amplified his influence. He led the efforts to enhance financial regulation, focusing on risk management, prudential supervision, and consumer protection. His leadership at the FSA helped establish a robust regulatory framework, ensuring the stability and integrity of the UK’s financial system.

However, the effectiveness of the FSA was questioned in the aftermath of the global financial crisis of 2008. Although it played a crucial role in stabilising financial markets through close coordination with overseas regulators and policymakers to implement measures to restore confidence, it was subsequently deemed ineffective in regulating and preventing the bank failures that ensued. 

In 2013, the UK introduced the ‘Twin Peaks’ financial regulatory model, which separated prudential regulation under the Prudential Regulation Authority from conduct regulation under the Financial Conduct Authority. The approach aimed to enhance the transparency and accountability of financial institutions while ensuring consumer protection and market integrity.

Davies has extensively analysed regulatory frameworks in the UK and globally. His book Global Financial Regulation: The Essential Guide (2008) provides valuable insights into the complexities of financial regulation. Davies believes in striking the right balance between regulations that ensure stability and protect consumers while fostering innovation and competition. He stressed the need for regulatory agility and adaptation to keep pace with the rapid changes in the financial landscape.

Davies delves into the complexities of different regulatory frameworks and the need for adaptability in response to fluctuating market dynamics. He advocates for a regulatory environment that enables responsible risk-taking and supports technological advancements.

Furthermore, he believes in the importance of effective supervision and enforcement to maintain the integrity of the financial system. His experience as the chairman of the FSA and his expansive involvement in global regulatory discussions have allowed him to contribute to shaping the regulatory landscape around the world.

His book, The Chancellors: Steering the British Economy in Crisis Times, offers a comprehensive exploration of the challenges faced by Chancellors of the Exchequer, equivalent to finance ministers, in managing the British economy during times of crisis. It looks into the intricate relationship between economic policy and political decisions, between the BoE’s mandate over monetary policy and interest rates, and the Treasury’s mastery of fiscal policy and public debt, shedding light on the role of chancellors in steering the economy through turbulent times.

Through this work, Davies brings his wealth of knowledge of economic policy and governance to the forefront, offering sage insights into the dynamics of banking crises, moral hazard, and stability.

Davies’ views on the current development in the financial services industry highlight his intuition and understanding of the complexities faced by banks and regulators. His analysis of the banking liquidity crisis is telling, particularly with regard to the importance of robust supervision and risk management practices.

Lessons learned from the global financial crisis

Having witnessed the global financial crisis first hand, his works, specifically The Financial Crisis: Who is to Blame? (2010), reflect his deep understanding of the causes and consequences of the crisis.

He talks about the need for strong risk management practices, effective corporate governance, and increased accountability within financial institutions. He recognises that the crisis exposed significant weaknesses in the financial system and that it is important to learn from these lessons to prevent future crises.

His experiences as the chairman of NatWest Group further inform his approach to risk management and resilience-building within the banking industry. His discernment pilots his approach to leadership and decision-making, guiding the bank towards sustainable and resilient growth.

Extensive career experiences and relevance to the industry today

As a polymath, Davies has held key positions in leading organisations and institutions. His background in academia includes a professorship at Sciences Po and an honorary fellowship at the University of Oxford, reflecting his contributions to teaching and research. Additionally, his experiences over the course of his diverse career path, including his time at LSE, have enhanced his understanding of the industry and its broader socio-economic implications.

The circumstances under which Davies left his role as director of LSE speaks to his strong sense of integrity and honour. In 2011, he resigned from his position following criticism and controversy over LSE’s relationship with the Libyan regime under Muammar Gaddafi. Despite not being personally involved in the decision-making process, Davies assumed responsibility for the university’s actions and stepped down to maintain the institution’s reputation and moral standing. This episode exemplifies his commitment to ethical conduct and upholding the principles of transparency and accountability.

Davies’ educational background further highlights his dedication to continuous learning and intellectual growth. He obtained his Master of Arts in Modern History and Modern Languages from the University of Oxford, where he developed his proficiency in historical and social contexts that have shaped the financial world. He also holds a Master of Science in Management Science from Stanford University.

His academic achievements demonstrate his commitment to a well-rounded education and his ability to draw from a diverse range of disciplines in his professional endeavours.

Davies’ contributions and achievements have been recognised through various accolades, including being appointed an officer of the Order of the British Empire (OBE) by the Queen of England. The OBE reflects his significant contributions to the financial services industry and his dedication to public service. It is a testament to his leadership, expertise, and impact on the industry, and society as a whole, and his considerable influence in shaping the financial services industry.

Davies’ experiences on the global stage have further cemented his authority on global financial markets and regulation. His tenure on the boards of the GIC, formerly known as Government of Singapore Investment Corporation, and one of the world’s largest sovereign wealth funds, and Morgan Stanley provided him with valuable insights into global investment trends and practices.

His role as the chair and member of the international advisory council of the China Securities Regulatory Commission and China Banking and Insurance Regulatory Commission allowed him to engage with the complexities of the Chinese financial system and understand the global implications of its financial development. These experiences have given him a unique perspective on navigating the challenges and opportunities in an increasingly interconnected world.

Davies’ influence extends beyond individual organisations. He has been actively involved in various global forums, such as the World Economic Forum and the Group of Thirty, where he has contributed to shaping international financial policies and addressing systemic risks. His expertise and thought leadership have been sought after by policymakers, industry leaders, and academics, giving him ample opportunities to continue to make an impact on banking, finance, economics, leadership, and academia.