Financial services in perspective

Professor Anthony Karydakis chatted with The Ticker about a range of topics concerning the current economic environment and provided his insights and observations on the banking industry. He talks about the restoration of investors' confidence in the stock market and discusses the changes the financial services industry has undergone after the collapse of top investment bank Lehman Brothers.

With the collapse of the investment banking industry as we knew it, do you think access to capital will remain constrained for many years or do you think banks will resume lending any time soon?
I think it will take quite some time for the banking system to find itself in a position where it can resume its normal lending practices. Although the banking system has remained, to some extent, out of nasty headlines in recent months, it is still vulnerable and the toxic assets are still there. The process of removing the toxic assets is still neccessary, and it has been very slow and somewhat frustrating thus far. Banks are barely capitalized adequately. At least, they are not capitalized to a point where they feel comfortable adding risk weight on their balance sheets by making loans to consumers and businesses. They are not in a position to add risk-weighted assets to their balance sheets and I think that they will not find themselves in a position to start doing that for the next year or two. It's going to be a very slow return to soundness for the banking system. It's not going to happen very quickly and there are lingering problems that still need to be addressed. However, we have the luxury of addressing them in a somewhat less − torn environment compared to a year ago, when the name of the game was to salvage the system at any cost. The system has been saved for now, but it hasn't returned to health.

How has the financial landscape changed post-Lehman?
Well other than the obvious thing that some firms are no longer in business, a considerable number of major financial institutions are still limping. A lot depends on what happens with the bank regulatory changes, the overhaul of the regulatory environment that is least being considered right now by congress and what version of it will actually come to pass. The more restrictive the new regulatory overhaul turns out to be, the more different the financial landscape of banking will look three years from now, compared to what it used to look like. I think that a lot will depend on how hard congress and bank regulators will come down on the financial industry with the purpose of cleaning it up. I'm not terribly optimistic that they will be very strict. I think people have short memories and once we patch things up for a while there will be some leniency on the part of regulators, things will gradually start to go back to normal and we will be working our way towards the next crisis.

What skills should students develop that will be demanded in the future in the financial services industry?
It's a very hard question to answer. In the last 10 or 15 years, the name of the game was quantitative skills. The "quants" were much in demand. All of those now-famous exotic, toxic derivatives instruments required very advanced quantitative skills on the part of the people who were designing and selling them. I think that the luster has rubbed off for obvious reasons and there will be a little less need by the employers to focus on quantitatively-oriented people. But then again, maybe we haven't seen the next hot instrument that the industry will invent. Maybe, a few years from now, the new sexy instruments that the industry will be promoting will return to those esoteric and highly complicated constructs, which will require quantitative skills. I think it's an industry, to some extent, in transition, and it's very hard to say what the precise needs of the emerging industry will be in the future.

What advice would you offer to students looking to break into the financial services industry?
First of all, I think it's absolutely paramount in the minds of students that come out into the job market to be flexible in terms of the first job they would be willing to take. A few years ago, when the industry was flying high, I think that people with finance degrees were holding several cards and had multiple options. Things are tighter now, and it will require some flexibility, some ‘zig zagging,' in terms of career plans. If someone has the determination and full commitment to get into the financial industry, it doesn't really matter how appealing the job may be. It may not be as appealing as it may have been 2 or 3 years ago, because then there would have been more jobs to choose from and you had the luxury to choose exactly what you wanted and what was consistent with your career plans. Right now, as a totally practical matter, one has to get whatever is available. You can build your career starting from a first job that may be less than perfect.