Big banks see need to shrink amid ob­sta­cles

The Pak Banker - - FRONT PAGE -

When the US Fed­eral Re­serve's new­est pol­i­cy­maker Neel Kashkari dropped a bomb­shell with a call to break up big banks on Tues­day, it was met with a pre­dictably in­dig­nant re­sponse from their lob­by­ists. One de­scribed his com­ments as "blind." But while no one in the ex­ec­u­tive suites of ma­jor global banks would want au­thor­i­ties to force them to split up or down­size, many top bankers ac­knowl­edge that their in­sti­tu­tions might be bet­ter off smaller and sim­pler. They just worry that any ma­jor re­struc­tur­ing could go all wrong be­cause of the way post-fi­nan­cial cri­sis reg­u­la­tions are ap­plied.

In in­ter­views, six se­nior bankers said they are strug­gling with the costs and re­stric­tions they face as a re­sult of new reg­u­la­tions, as well as a weak global econ­omy and trou­bled fi­nan­cial mar­kets. The bankers, who are or re­cently were in po­si­tions rang­ing from busi­ness divi­sion head to CEO, spoke on the con­di­tion of anonymity so they could be can­did with­out up­set­ting reg­u­la­tors or in­vestors. "Fun­da­men­tally, the busi­ness has to change," said one vet­eran banker who was on the ex­ec­u­tive com­mit­tee of a ma­jor Euro­pean bank un­til re­cently. Big banks' share­holder re­turns have sunk "too low," he said.

Th­ese prob­lems are not new, but they have fresh rel­e­vance as Deutsche Bank AG (DBKGn.DE) con­fronts ques­tions about its cap­i­tal ad­e­quacy, Bar­clays PLC faces pres­sure to break up and CEOs of big U.S. banks strug­gle with a loss of in­vestor con­fi­dence in their stocks. Man­age­ment teams in the US and Europe are now tak­ing a hard look at dra­matic busi­ness model changes, but none of the op­tions are par­tic­u­larly at­trac­tive, the bankers said. Merg­ing to cut costs and im­prove mar­gins is out of the ques­tion, given the hur­dles banks would likely face from reg­u­la­tors who do not want "too-big-to-fail" in­sti­tu­tions get­ting any big­ger. Split­ting apart is com­pli­cated by cap­i­tal re­quire­ments that would make stand­alone trad­ing busi- nesses eco­nom­i­cally un­fea­si­ble - and by the fact that there are few, if any, buy­ers for the as­sets banks want least. Some top bankers say they are left with lit­tle choice but to mud­dle through what they fear will be a long, dark pe­riod of weak earn­ings, an­gry share­hold­ers and grad­ual shrink­age. The prob­lem has got­ten so bad that Deutsche Bank CEO John Cryan re­cently said on a pub­lic con­fer­ence call that he'd much rather be CEO of a sim­pler, retail-fo­cused bank like Wells Fargo & Co (WFC.N), which has only a mod­est in­vest­ment bank­ing op­er­a­tion. "Un­for­tu­nately," he said, "there are lots of things I wish for that are not go­ing to come true." Kashkari's com­ments, in his first speech as head of the Min­neapo­lis Fed, were sur­pris­ing be­cause he is a for­mer Gold­man Sachs banker, a Repub­li­can, and was a se­nior Trea­sury of­fi­cial in Pres­i­dent Ge­orge W. Bush's ad­min­is­tra­tion dur­ing the fi­nan­cial cri­sis. They partly echoed the stance of Bernie San­ders, who has also called for big bank breakups and crit­i­cized Hil­lary Clin­ton, his ri­val in the strug­gle to be the Demo­cratic pres­i­den­tial can­di­date, for be­ing too close to Wall Street.

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