Who among the world's population of authors would not love to write a timeless work? Ideally, a timeless work of fiction, but failing that, something factual that remains the undisputed benchmark for its subject. Somewhat paradoxically, I hold that the latter is actually harder to accomplish. Please don't get me wrong, only a very small minority of us (of which I am not one) have it in them to produce Hamlet, or Dune, or The Iliad, or The Assistant, or Crime and Punishment, or The Adventures of Sherlock Holmes, or The Crab With The Golden Claws, or Seven Pillars of Wisdom, or Peanuts, Featuring Good Ol' Charlie Brown, or countless other such immortal works. But once one has produced classic art, it lives forever. There is no need ever to update or modify it.

Practitioner textbooks, on the other hand, are rarely timeless. In almost every field of learning, society develops and adds to its knowledge base, such that a work of non‐fiction rapidly becomes out of date. To maintain currency requires constant updates and further editions, which means more work. An author ambitious of producing a literary masterpiece should avoid the factual learning genre.

But there is an apparent paradox when it comes to works of fact concerning banking: in theory, unlike in so many commercial disciplines, the main principles have not changed since the first modern banks came into being in the fifteenth century. Much of what held good for banks in 1808 and 1908 would have remained fine for banks in 2008, if certain senior bank executives had been competent enough to remember them (or even bothered to learn them in the first place).

The traditionally staid and “conservative” field of banking has experienced considerable development and change of late. However, if anything, this “development” has not been all positive. While lauding the introduction of tools and techniques that have enabled borrowers to reduce their risk and assist economic growth worldwide, most of us are now rightly wary of ever‐more sophistication and complexity in finance. It really is time for banks, and banking, to revert somewhat to the basics of finance and look to deliver genuine good customer service, and roll back the ever‐increasing complexity in the industry. Why? Because such sophistication often ended up doing more harm than good.

Finance is as much art as science anyway. So much of it is expectations based on assumptions, despite what the financial market “quants” would tell you. That this is not known universally is itself worrying, with bankers the world over convinced that the stated gross redemption yield of a bond purchased in the secondary market is actually what they will receive for holding said bond. The valuation of equities, the calculation of default probability, the expected life of a loan, the “risk weighting” of a loan asset, the “expected shortfall” risk exposure of a trading portfolio…these are all so much estimations based on assumptions. Which person in their right mind, trying to do the right thing for everyone, would wish to build sophistication on such a foundation?

In any case, in many countries banks have managed to transform their image from perceived bastions of stability and good social standing into seeming snake‐oil selling hucksters of low repute and lower intentions. This is a pity, because without banks performing their vital roles as secure stores of money and maturity transformation specialists, economic and social development would take place at a much slower pace. So while it is almost unarguable to state the importance of banks and the good they do for society, it is also unarguable to state that the work undertaken by banks must reflect sound risk management principles as well as scrupulous ethics and good intentions.

Hence, it becomes necessary to update the first edition of this “introductory” book about banking. The first edition isn't necessarily out of date, at least not all of it anyway – more that it doesn't emphasise the principles of banking as strongly as it should have. And of course it was never going to be timeless…works of fact so rarely are. But this second edition, requiring readers to shell out their hard‐earned cash for a second time, is needed so as to emphasise more of the principles of banking as well as update some of the technical content.

In any case, any author would do well to remember the words of Sir Arthur Conan Doyle from the preface to The Sherlock Holmes Stories (1903):

“…all forms of literature, however humble, are legitimate if the writer is satisfied that he has done them to the highest of his power. To take an analogy from a kindred art, the composer may range from the oratorio to the comic song and be ashamed of neither, so long as his work in each is as honest as he can make it. It is insincere work, scamped work, work which is consciously imitative, which a man should voluntarily suppress before time saves him the trouble.”

So that is the ultimate objective of this revised second edition: not to attempt to achieve timelessness and immortality, which would reflect only a monstrous and insufferable arrogance and egotism on my part, but rather simply to be viewed by readers as a work of honesty that was done to the best of the author's ability and that, if the market allows it, can remain of value on the bookshelf for many years to come. Irrespective of whether this last ambition is achieved, I hope at least that this book has served its purpose for today. And as Ian MacDonald so memorably said in the preface to his last update of the majestic Revolution In The Head, no further editions will be forthcoming.

LAYOUT OF THE BOOK

This book is comprised of 17 chapters, grouped in three parts. There is some rhyme and reason in the split: Part I may be considered a primer on the basics, not just of banking, but also the interest‐rate markets, customer service, and credit assessment – essentially, the basics of financial markets. Part II looks at the balance sheet in general, and asset–liability management in particular, while Part III covers strategy, regulatory capital, and operational risk.

For newcomers to the market there is a primer on financial market arithmetic in Appendix A at the back of the book.

New material in this second edition includes:

• Case studies on problem solving involving several real‐world risk management issues (and solutions) the author has been involved with;
• A chapter on liabilities strategy setting, as part of the balance sheet optimisation process;
• A detailed look at the importance of understanding net interest margin (NIM);
• Best‐practice ICAAP and ILAAP process principles;
• Various reasonably important sundries such as strategy and operational risk management.

As ever, the intention is to remain accessible and practical throughout, and to provide information of value to the practitioner in banking – we hope sincerely that this aim has been achieved. Comments on the text are welcome and should be sent to the author care of John Wiley & Sons Ltd, Chichester, England.