Delamaide: Rules push big banks to downsize
(Photo: Spencer Platt, Getty Images)
WASHINGTON
— Financial regulators are not prone to gloating in public, but there
is probably some private satisfaction among government officials that
new rules are putting more and more pressure on the biggest banks to
downsize.
Higher
capital requirements and higher compliance costs for restrictions on
derivatives and other speculative trading, combined with a
low-interest-rate environment and huge penalties for infractions are
squeezing profits at the big banks. This, in turn, is leading to
shareholder pressure to divest or restructure, or to find some other way
to get smaller and more profitable.
"The universal banking model is broken, a fact some banks have realized," the influential Lex column of the Financial Times pronounced last week, reflecting a growing sentiment among investors.
"Universal
banking" traditionally refers to having commercial and investment
banking under the same roof, but it became conflated in the go-go years
of bank expansion prior to the financial crisis with global banking, and
referred to big banks that did everything, everywhere.
These
included first and foremost American giants like JPMorgan Chase,
Citigroup and Bank of America, as well as foreign institutions like HSBC
of Britain, UBS of Switzerland and Deutsche Bank of Germany.
In
the wake of the financial crisis brought on in great part by the
activities of these banks, the market environment and the regulatory
backlash have greatly eroded their profits.
"The financial arguments for global banks no longer appears convincing," theEconomist concluded in a lengthy analysis last month.
Smaller,
nimbler banks focused on a particular line of business or a specific
domestic or regional market are getting much higher returns on equity,
lower cost of funding and less burdensome compliance costs.
Investors and many bank managers are seeing the light. As the FT noted,
management at Royal Bank of Scotland and UBS have retreated in whole or
in part from the "universal" model, and breakup proposals are finding
their way onto the agendas at shareholder meetings of the biggest U.S.
banks.
The recommendation from Goldman Sachs in
January that JPMorgan would be better off split into two, three or four
separate institutions was the catalyst for much of the current
discussion.
It
was of course the difficulty of managing these sprawling institutions
that led to the abuses and excessive risk-taking that precipitated the
crisis, exacerbated by the entry of second-tier wannabes into an
overcrowded sector.
These problems remain. But, as the Economist noted
in its analysis, "If mismanagement and fierce competition were problems
before the crisis, the regulatory backlash after it has been brutal."
U.S.
regulators have stepped up enforcement of money laundering, tax evasion
and economic sanctions, the newsmagazine noted, slamming foreign banks
in particular with steep fines and forcing them to spend more money on
controls.
Meanwhile,
regulators here and abroad are doubling and tripling capital
requirements for the biggest banks, adding new rules for maintaining
liquidity, and enforcing "ring-fencing" rules that keep capital from
being double-counted for different purposes.
In his Lex column, FT writer
Oliver Ralph said, "The universal banks have to change." He suggested
three options: the axe, the scissors and the nail file.
RBS,
which is chopping off virtually all its investment banking activities,
is an example of the axe. UBS, which is trimming its investment bank
activities to focus on wealth management, is an example of scissors.
JPMorgan, for its part, is trying to get by with tweaking its businesses, hoping a nail file will do the trick.
The
New York bank and some of the other global players are holding out hope
that an improving economy, a gradual return to a normal interest-rate
environment and the adjustment to higher capital and compliance costs
will enable them to get back to a satisfactory profit.
But investors are restless, the FT's Lex writer believes.
"For
the universal banks," Ralph says, "2015 is a critical year. If they
cannot make the model work, they should admit that the nail file has
failed — and get out the axe."
Then
regulators can permit themselves a quiet smile in private that their
post-crisis response has had the desired effect of creating a market
environment forcing banks to downsize and alleviating the problem of too
big to fail.
Business
columnist Darrell Delamaide has reported on business and economics from
New York, Paris, Berlin and Washington for Dow Jones news service,
Barron's, Insti
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