As a banker, Moorad Choudhry has spent over two decades working on structured products at ABN Amro Bank NV, JPMorgan Chase Bank and is currently the head of treasury at Europe Arab Bank plc in London, a subsidiary of Arab Bank. He is also a visiting professor at the department of economics, London Metropolitan University and has authored over 15 books on global finance. Choudhry has a postgraduation in econometrics from Reading University and an MBA from Henley Management College, and is a fellow of the Securities Institute. In an email interview to fe?s Saikat Neogi, he talks about the future of investment banking, credit derivatives market and the lessons from the slowdown. Excerpts:

After the economic downturn and liquidity crunch, what has been the most significant development in the global credit markets?

Actually, it is too early to say what the most significant development has been because markets are still suffering from the fallout. But we are witnessing now renewed emphasis from regulators on bank liquidity risk management and on the whole concept of the ?lender of last resort?. Liquidity is as important as bank capital, and must be addressed as such. Banks that rely, implicitly or otherwise, on being bailed out by the government now have to accept certain restrictions on their size and strategy. Other features of the current bank business model, such as return on capital (ROC), targets and leverage ratios, are also being re-assessed.

What kind of innovation is expected from global financial institutions in the near future? And will it be sustainable?

Innovation is no longer the hot topic in finance. If anything, the emphasis will be on back to basics, with an emphasis on loan origination standards and know your risk. The influence of the physicist on the trading floor in the form of the quantitative analyst has not necessarily been all good. Risk exposure measures such as value at risk (VaR) have not captured the extent of bank risk, and the financial engineer?s efforts to model the behaviour of markets didn?t work as expected, just as it didn?t earlier with long-term capital management. I expect innovation now to focus on better ways to capture and present management information, and more transparent understanding of credit risk and growth risk at the company board level.

Post-Lehman, do you think investment banking is seeing a paradigm shift in the way it operated and expanded its operations?

Most definitely, I think we are in the midst of a paradigm shift right now, which will see a change in the basic banking business model. Many market practitioners do not accept this and are just waiting for the economy to recover and everything to return to normal. However, it would be a mistake and it wouldn?t transpire either. If we ignore banks such as JPMorgan or Goldman Sachs, which appear to be in a class of their own, I predict that the new business model will emphasise:

* a lower, more sustainable return on capital employed (ROCE) target, more like 10-12% rather than 18-20%

* relationship-based banking rather than the growth and originate and distribute model

* no more banks that are too big to fail, or if there are, governments forcing the break-up of such institutions

* a capital base that is counter-cyclical, utilising products that enable banks to raise contingent capital for use in bear markets

* lower leverage ratios

* self-sufficiency and diversity in funding sources

* a liquidity buffer of high quality assets that all banks will hold to act as a liquidity cushion in tight interbank market conditions.

What are the lessons for bankers from the US subprime and credit crisis and how best can one prevent such things in the future?

The first lesson remains, as always, know your risk. And more pertinently, know your counterparties? risk. A herd mentality should not be the approach to investment and asset allocation. In the UK, we have seen plain vanilla savings-and-loan institutions such as Dunfermline Building Society having to be bailed out by the government, partly because of losses on their commercial property loan book and also because of losses on holdings of US sub-prime mortgage backed securities. Why on earth would such firms be holding such assets? Their expertise did not extend to these types of bonds, and they were caught up in a lemming-like rush at the top of the market. The investment bank UBS was obsessed with market share of the structured credit origination market, and expended its balance sheet exposure to these products in an effort to compete with the likes of JPMorgan. We saw the eventual results. An obsessive competition with your peers is poor business strategy.

Prevention of crisis in the future will depend on many things because it was many factors that caused it. In any case financial crises are an ingredient of free capital markets. However, at the individual bank level, bank managers can mitigate the impact of the next crisis by targeting a sustainable ROCE, preserving bank liquidity, maintaining a countercyclical capital base, and avoiding excessive leverage ratios. And knowing their asset risk!

We see a host of stimulus packages worldwide. Where would the extra money pumped into the system lead us to in the future?

This is the topical issue right now. Governments worldwide from the US to the UK to China have been right to use public funds to take up the fall in demand, not least to prevent deflation taking hold. The risk is of course that the tap is not turned off soon enough and rampant inflation takes hold. The timing is crucial. But this is a problem for 2011 or 2012, not now. It has been the right response to use fiscal stimulus to prevent the recession from biting even deeper.

In the wake of the global financial crisis, do you think the credit derivatives market will regain investors? confidence?

A liquid CDS market is a vital tool in aiding the transparency of the credit markets for investors. I do think that a centralised clearing house, along the lines of what is used to clear exchange-traded futures, would greatly help the market. Though I would recommend a name-give-up system, a bit like what we see in Repo Tri-Party trading. But as a product in its own right, the CDS remains an elegant and transparent instrument, and should be emphasised as such.

Globally, how strong are the green shoots of recovery that we hear about and what kind of recovery do you see in consumer demand?

The shoots remain just that and patchy. Some sectors are recovering better than others. I would remain cautious about the economy as a whole, although I don?t think it will get worse from here, I just think the recovery will be very slow. Unemployment in the US and the EU, which is a lagging indicator, will get worse before it gets better. The crash was caused by the interaction of many factors, and some of these?such as the imbalances caused by exporting countries having to place their surplus US dollars in US Treasuries, and thereby financing the US consumer deficit?will not disappear over night. World trade also has some way to recover from the severe contraction it has suffered since 2007. Investors therefore need to remain cash rich, and invested at the short and medium end only until we see some more tangible signs of sustained improvement.

You have authored 15 books and what are you currently working on?

I have two projects on right now, the first is a guide to banking that looks at the essentials of bank asset-liability and liquidity management, plus a lessons learned from the crisis, entitled The Principles of Banking, which will be published by Wiley Asia next year. My other project is a co-written work with Gino Landuyt that presents the new finance and investment paradigm in the wake of the crisis.