Big banks see need to shrink amid obstacles
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.