June 10, 2008 / 10:14 AM / 10 years ago

HSBC says excessive bank leverage model "bankrupt"

LONDON, June 10 (Reuters) - Banks need to return to more basic business plans as the model based on the excessive leverage of recent years is “bankrupt”, the head of HSBC (HSBA.L) said on Tuesday.

That could see return on capital fail to match levels seen in recent years, although some of that has been inflated, HSBC Chairman Stephen Green said.

“The huge build up of leverage in the system over the last five years where profit depended on high and ever increasing leverage, that model is gone, and that model is gone because it is bankrupt,” Green said at a British Bankers’ Association conference.

“This isn’t just the end of a bubble, it’s the end of the business model,” he added.

Asked if that left banks facing lower return on capital, Green said: “I don’t think we’re in an era, looking forward, where returns on capital will look as good as they did looking backwards. But it’s worth noting that some of the returns of capital looking backwards were inflated, and much of the returns were subsequently given back.”

Green said banks need to go back to basics and sustainable profit growth, based on strong customer relationships, operating efficiency, activity in fast growing markets and strong capital. (Reporting by Steve Slater; editing by Sue Thomas)

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