Bank reform is in full swing and the stakes are high. Too little constraint and the deficiencies that led to systemic crisis will return-but, equally, the industry runs the risk of overcorrection, imprisoning the sector in a rigid, risk-averse and low-growth period.

Yet as banks reassert control, the pendulum is swinging hard in a conservative direction. Regulatory censure of product categories, liquidity and capital constraints and caps on bonuses may prove to be blunt instruments that create a future pendulum swing to liberalisation—and so the cycle will begin again.

It would be better to work hard now on embedding intelligent and informed risk-taking across all banks. The crisis exposed profound flaws in banks' management of risk and capital decision-making that had been papered over by soaring growth. Prudent banking was turned upside down: pressure to book earnings gains on the profit-and-loss statement superseded the quality and stability of the balance sheet. Bankers rushed to oblige, placing their trust in computer models to control risk. Exotic products and leverage moved them further up the risk curve. Incentives helped to feed the excess.

Yet stamping out entrepreneurialism throughout a bank's culture is not the answer. Restoring rigour to risk management and capital allocation requires tackling the problem at its source-decision-making. Banks can achieve a better balance by establishing clear, effective decision processes to weigh risk and deploy capital according to the bank's strategic objectives and its longer-term efforts to increase shareholder value.

Banks need to provide boundaries and guidelines for prudent, high-value risk-taking. Even now, few banks have a clear statement of their institutional appetite for risk or a consequential risk and capital strategy. Where they do exist, they are often poorly understood by the managers empowered to deploy risk capital. Risk appetite must be reflected in management's objectives. And by making its appetite for risk transparent, a bank can better define its risk profile to investors and the external market.

Additionally, top executives should articulate how risk and capital figure in line managers' decision-making and put in place the functional capabilities required to help line leaders to execute it. Banks need a partnership structure of functions, committees and line management to ensure that good decisions are made—with accessible information, appropriate insight and minimal bureaucracy. The role of the centre should be to set boundaries for the types and sources of risk that the bank should consider taking on, and put in place a process that ensures thorough analysis underpins key decisions.

At the same time, the role of the banks' business units should be to make rapid, well-informed decisions within a clear framework—supported and challenged by a strong local risk function.

The trick, as it always has been for bankers, is to ensure that their decisions strike a better balance between risk and return than their competitors.

Mike Baxter is a partner and member of the global financial services practice at Bain & Company, a business consultancy.