A return to Vanilla: What will the banks do next?

One thing is for sure the banks are going to be very careful not to create financial products that look like those that have helped create the crisis. We can anticipate that many financial firms will revert to plain vanilla trading to try and build up some confidence with their clients. Keep simple, keep it stupid, might be the order of the day, for a while at least.

But it's very unlikely that the vanilla flavour is going to last for long. One of the great capabilities of the finance industry is the ability to invent new ways of making money and this will return as soon as possible. We'll probably see the death of securitisation for a short while, as this type of product will be unattractive. The resurrection of securitisation can be guaranteed. However, as the banks work though the problems of transparency and pricing, they are sure to bring forth products that carry many of the benefits of a previous manifestation but with less risk.

As risks or the new interpretations of risks materialise and new models are introduced the banks will be able to market and sell financial instruments that may look like the old but carry none of the baggage.