Interview with The Ultimate Banker – Edwin Lim


The following is an interview with Edwin Lim, co-author of The Ultimate Banker.  Edwin has more than 23 years of banking experience and held COO appointments in many banks. Now, he wants to teach you how to have a successful career in the bank.

What prompted you to write the book?

I decided to write this book 3 years ago because I felt frustrated that most of the books out there were mainly marketing the authors themselves or by people who had not made it and provided misleading information of what it is really like. I believe that for those who have reached the top of their careers will be able to identify with the fact that it’s never easy when we take the first steps in the corporate world. For me extending a helping hand for those who want and are ready to help themselves is extremely fulfilling and our younger generation deserves every bit of it.

Given my medical condition, completion of this book took on a sense of urgency as I wanted my 2 sons (who are in their late teens) to use the book to chart their career in the event I am not around.

What is the main message behind the book that you would like your readers to take away?

Hard work is a prerequisite, but working smart and identifying opportunities to propel up the corporate ladder especially in a competitive financial industry is a skill to be acquired. Why waste time stumbling in the dark when you can call upon people who could assist you to navigating around potholes, but you must first know where to look. Often we overlook the simple things and struggle unnecessarily. I truly hope this book makes a difference in peoples’ lives and know that they are not alone in their quest to succeed

For our local banks, what is the main source of their income? Is it returns from borrowing money or does more income arise from trading activities? What about global ones like Citi?

As explain in my book, there are various types of banks, ie retail, corporate, investment and private banking banks, and each will target different market segments and offer / focus on different products and services. So our local banks which are primarily providing retail and corporate banking services and have a lion share of the local market, would derive the bulk of its income from interest income (ie customer loans, mortgages etc) not trading. For example, based on FY2011 results, DBS and OCBC interest income accounted for 63.2% and 60.6% of total income respectively,  while DBS and OCBC treasury and trading income (in broad terms) accounted for only 9.1%, and 9.6% respectively.

However, for an overseas retail/corporate bank operating in Singapore where they have only a small slice of the retail and corporate business there is a high probability that trading income represents a high percentage if not the main source of income. This probably would apply to our local banks operating overseas measured on a country basis.

Citibank as a global bank, even though it offers full range of banking services including investment banking and wealth management, it’s interest income represents 61.8% of total income as its core strengths are in retail and corporate banking. On the other hand, take an investment bank like Goldmansachs, you will see its institutional client services division which includes fixed income, currency, commodities and equities trading accounts for 60% of total revenue.

How has the QEs affected the banks’ operations and profitability?

There is no definitive proof to say QEs directly affected banks’ operations and profitability worldwide or even our local banks. It may have improved market sentiments, prevented a further escalation of the economic crisis, kept interest rates low, and boost liquidity, but it also create headaches for other countries as excess liquidity pushed inflation further up as we experienced in Singapore, weaken US dollar affects exports, and for Hong Kong which pegs their currency to the US dollars saw it’s central bank stepping in for the first time last week since 2009 to prevent it’s currency from rising against the US dollar. So there is a push towards spending and trading got a lift but banks don’t seem to have gained or loss significantly based on quarterly results.

What is your view of the banking industry in Singapore in the next 5 years? Would there be further consolidations of our local banks? Do you think foreign banks would gain a bigger foothold in the local market?

If we see Singapore banking industry as a matured industry operating with a local market base of 5.3 million people serviced by slightly more than 200 banks it looks congested. As mentioned in my book we can’t have a silo mentality, we must open up to see the big picture, i.e. how Asia economies are transforming and what the crisis in Europe means for us in terms of opportunities.

The chapter on wealth management is to focus and tap on the rising number of millionaires and high net worth individuals in Asia. Singapore is the Switzerland of Asia so do you think banks will forgo the opportunity to setup a base here? Furthermore, I also covered investment banking to highlight the significant number of opportunities globally that bankers can capitalise on as Asian SMEs are expected to grow and expand regionally and globally in the next 10 years. In essence the industry has bright future but the challenge is adopting the right strategy.

We should acknowledge that the global banking landscape has changed in our favour following the financial crisis. Singapore’s 3 local banks have been named within the top 20 world’s strongest banks, this in itself is a great achievement. Consolidation is off the cards for the mid-term since as our local banks are in a stronger position to compete. This should be the period to capitalise on its strengths and expand regionally or internationally to build up its asset base instead.

Foreign banks are fully aware Singapore’s domestic limitations so I doubt they are too keen to fight for a bigger share of the market, instead foreign banks are using Singapore as a region hub to expand into the region.

There is a very interesting section about trading in the book which I am sure our readers would like to find out more about that.

The best traders you know, what is one thing they all have in common? What are their gender, age, educational background, or racial profiles like?

As mentioned in the chapter on “Treasury – Becoming The Top Trader”, there many personality traits and character profiles to be considered and developed. Personally I feel that the best traders are not born with the “Midas touch” instead they hone in on their skills, pay “tuition fees” for mistakes, and learn from the best. You definitely don’t want to be a cowboy who shoots from the hip and pray for a hit like most of us do at casinos.

In the banking world good traders tend to be within late twenties to early thirties as the “bad” are removed early in their career and the high fliers move on to take on more senior roles in their mid-thirties or “retire” to enjoy life. This doesn’t mean as an individual trader you need to be young, it’s just that banks have the luxury to choose the best of the best from a huge pool of candidates. You can be just as good as there is no one size fits all profile in terms of age, education, gender or race.

What is the edge bank traders have over retail investors? Conversely, do you think retail traders have a chance of beating the professionals over the long run?

Overall bank traders have vast resources made readily available to them such as dedicated research teams and analysts support, real time news feeds, use of brokers, and trading in an environment where they literally feel the heartbeat of the market. However, bank traders are human too, so if they do not use the vast resources effectively or misread the markets they will also make losses. What we don’t see is the fact that banks will not hesitate to fire non performers.

So the question is how we equip the retail trader with the right tools and skills (which banks used to monopolise) given today’s advancement in technology, access to market tools, and training. In my opinion it is possible (on equal footing) for today’s retail trader to have a chance to beat the professional in the long run.

What kind of education or training process do traders go through? Can this be replicated beyond a bank in private practice?

Banks tend to select degree holders not because they are smarter but because our paper chase society has churned out more “educated” candidates. Twenty years ago “O” levels was sufficient and these traders made their millions too.

With reference to the section on “Not Your Typical Treasure Chest”, we explained the importance of mastering both hard and soft skills. The hard skills, i.e. practicing on simulation models and platforms based on proprietary algorithms are now available to both banks and private individuals. Difficulties of learning hard skills is not because of the complexities of the big picture but the subtleties which only top traders can teach, thus this skill must be learnt from them. This is why we will make this information accessible in our next book about what these subtleties are and how to train yourself to acquire them. As for soft skills, the challenge for a private individual is finding top traders to observe, understudy and communicate with to develop the required skills.

As traders do not have their own money on the line, does it mean they remain more rational vs someone who is managing his own portfolio?

No it does not. It’s like me giving you a Lamborghini and allowing you on the autobahn and I bet you will push the speed limit to its max. The fact that it’s not your money there is a high probability to take more risks. This is why banks have the risk team (also known as middle office) to monitor the traders. You will be surprise the limits and controls established by the bank to manage traders. I will share more in my next book coming out next year on more behind the scenes of a bank.

What is the most common instrument for traders? For the Forex desk is it spot forex or futures or options or swaps? Or is it a combination of all?

According to the Bank of International Settlements 2010 records, which publishes official global trading volume every 3 years, the total daily average Forex trading volume was US$4 trillion of which FX Swaps took top spot of US$1.76 trillion while FX Spot volume was US$1.5 trillion, options was a mere US$207 billion. In terms of individual deal tickets issued in an average size trading room, it is usually common to see more spot deals done than swaps given the market liquidity and volume of trades dealt. For options and futures it depends on the structure of the team, and it is also normal that these trades may not be done daily as it is used for primarily for hedging.

What is a longest position one can possibly hold on to? days weeks even months?

Bank traders have to abide by limits and guidelines imposed by their respective bank based upon risks assessments and control policies. If you are referring to currency trading, positions held are usually over very short periods, i.e. a few days unless there is a strong case to hold for a few weeks. Equity trading is different as fund managers can always take on a long term view.

Would the banks have a desk trading the SGX counters actively? How about the Hong Kong and ASEAN markets?

Yes, banks trading equities can establish their own teams according market coverage and/or sectors. There is no fixed structure.

Is it true that traders crave for high volatility days? Do they make the most money for the bank and themselves during a crash like the one in 08?

Yes traders generally crave for volatility, maybe not wild sudden swings, but active movements. However, volatility is only one part of the equation as other information such as market news, geopolitical issues, technical analysis etc will be analysed to form the full picture in order to make an informed decision. I don’t have precise details whether traders benefited significantly from the 2008 crisis, but generally the more experienced traders will take full advantage of market turmoil to maximise their profits, eg.1992 when George Soros made US$1.1billion during the UK currency turmoil or currency speculators capitalized on the Asian financial crisis such that Malaysia was forced to take drastic actions to protect it currency.

You mentioned about restrictions imposed on bank traders. But why do we still see rogue traders losing billions for the banks once in a while?

You have brought up an interesting topic and one which seems mind boggling to all of us who are not in the banking world especially how such large fraud cases would go undetected until it is too late. It is true that banks are bound by many regulatory controls and in recent years there have been extreme focus in self governance too. In my book under the chapter “Risk Management : The Sheriff’s In Town”, I have highlighted the importance to rein in these lapses in control and also thrown in a war story to share my own experiences. Sometimes to be fair to the risk controllers it’s not easy to spot fraud immediately amongst the thousands of trades, thus experience and a keen eye to details are critical. Up to the early 2000s, the importance of the middle offices was never truly appreciated and were poorly managed. Today it’s a different ball game and banks are willing to pay a premium for these risks controllers but it will take time for the industry to build this pool of experts.

In late August, Dr Leong and I had discussed this topic at length and he went on to published an article called “Rogue traders just like any of us” in Straits Times where he highlighted several good points including Kweku Adoboli’s case.

To quote some parts of the article:

“For traders, how large their bonuses are depends on the total amount of money they have made in a fixed time period – usually over a year. Since they are paid on aggregate performance, not daily performance, traders are willing to take big risks to recoup losses before the end of an appraisal period. The chance to recoup the previous day’s losses with a windfall today may induce traders to take bigger risks.”

“But regulation is no panacea. Nor have many banks learnt from the past, as seen in several recent high-profile incidents in UBS, Societe Generale and JP Morgan, where total losses exceeded US$15 billion. Regulatory supervision and legislation can only do so much and this is not sufficient. More important is self-governance.”

I am in no direct position to comment on the inner workings or controls of UBS and how their senior traders acted. However in my time I have come across desperate or traders in pursuit of a fat bonus who will always try their luck to circumvent controls. Luckily it is not common but there will be a handful of rogue traders willing to test the limits especially if they are not closely monitored. Look at the Libor scandal as another example.

So if professionals are known to attempt taking high risks knowing the tight supervision and scrutiny they are under, what can be said for the retail investor who may be lured by empty promises of a sure bet?