Bank­ing faces an ex­is­ten­tial cri­sis

The Pak Banker - - OPINION - Mark Gil­bert

WHO would choose to be a banker th­ese days? Your col­leagues are dis­ap­pear­ing at an alarm­ing rate as your busi­ness shrinks. The reg­u­la­tors don't want you do­ing any­thing ex­cit­ing. The pub­lic de­spises you. And that's only the be­gin­ning of your prob­lems. The cen­tral banks are killing even your most plain vanilla ac­tiv­i­ties with their in­ter­est-rate poli­cies. Ev­ery quar­ter, your in­dus­try hands over an­other cou­ple of bil­lion dol­lars in fines for pre­vi­ous in­dis­cre­tions and mar­ket rig­ging. Some­thing called fin­tech is grab­bing the head­lines by threat­en­ing to dis­in­ter­me­di­ate you out of ex­is­tence. Your em­ployer feels em­pow­ered to de­fer your bonus for ever-in­creas­ing pe­ri­ods of time. And if­some­thing bad hap­pens on your watch, you might find your­self pay­ing back years of bonuses or even do­ing jail time.

Bank­ing is fac­ing an ex­is­ten­tial cri­sis. Av­er­age Wall Street bonuses dropped 9 per­cent in 2015, ac­cord­ing to the New York State Comptroller. More than half a mil­lion bank­ing jobs have been elim­i­nated around the world since the 2008 cri­sis, ac­cord­ing to cal­cu­la­tions by my Bloomberg News col­league Yal­man Onaran. But it's not just about peo­ple los­ing their jobs or mak­ing less money; the con­trac­tion should be trou­bling for any­one con­cerned with how the fi­nance in­dus­try can be an en­gine for eco­nomic growth when it's strug­gling even to de­lin­eate what a bank might look like in five years' time. Can banks be prof­itable and eco­nom­i­cally use­ful in the cur­rent cli­mate? Bill Gross at Janus Cap­i­tal, writ­ing last week, says that's un­likely:

In­stead of his­tor­i­cally gen­er­at­ing eco­nomic growth via a wealth ef­fect and its trickle-down ef­fect on the real econ­omy, neg­a­tive in­vest­ment rates and the ex­pan­sion of cen­tral bank bal­ance sheets via quan­ti­ta­tive eas­ing are cre­at­ing neg­a­tive ef­fects that I have warned about for sev­eral years now. Neg­a­tive yields threaten bank profit mar­gins as yield curves flat­ten world­wide and bank net in­ter­est-rate mar­gins nar­row. The re­cent col­lapse in world­wide bank stock prices can be ex­plained not so much by po­ten­tial de­faults in the en­ergy/com­mod­ity com­plex, as by in­vestor recog­ni­tion that banks are now not only be­ing more tightly reg­u­lated, but that fu­ture re­turn on equity will be much akin to a util­ity stock. On fin­tech -- which is broadly the threat that smaller, nim­bler, dig­i­tally na­tive com­peti­tors will steal chunks of the core bank­ing busi­ness -- most of the bank­ing in­dus­try seems to be whistling past the grave­yard. JPMor­gan Chief Ex­ec­u­tive Of­fi­cer Jamie Di­mon as­serted last week that banks are "pretty good at us­ing dig­i­tal tech­nol­ogy to make it eas­ier for cus­tomers," and that "it will be a chal­lenge for any­one to be bet­ter, faster, cheaper than us."

But the ef­fects of in­creased in­dus­try regulation are pal­try com­pared with the chal­lenge posed by fin­tech, Er­ste Group Bank CEO An­dreas Tre­ichl told Bloomberg Tele­vi­sion last week. "We don't need to be scared of the dig­i­tal chal­lenge be­cause if we don't man­age to go dig­i­tal, we're gone any­way." The longer bankers stay in de­nial about the chaos fin­tech might visit upon on their heads, the more at risk they are.

Banks and bankers shoul­der a large por­tion of the blame for where they cur­rently find them­selves. Take this ex­am­ple in Ger­many, where Uni­credit's Hy­povere­ins­bank unit is seek­ing dam­ages of 140 mil­lion euros ($154 mil­lion) from its for­mer chief fi­nan­cial of­fi­cer, the for­mer head of in­vest­ment bank­ing and the ex­chief of pri­vate bank­ing. The bank was whacked with fines over a tax scam which played fast and loose with share-own­er­ship and div­i­dend rules to gen­er­ate ill-got­ten gains.

No mat­ter how many lawyers de­clared the prac­tice le­gal, no-one in­volved in the wide­spread abuse (many other banks were in­volved in sim­i­lar sys­tem-gam­ing) could have been un­der any il­lu­sion about what they were up to: dodgy deal­ing which, at the end of the day, took money out of the pock­ets of Ger­man tax­pay­ers. Th­ese kinds of scams are typ­i­cal of the so­cially use­less fi­nan­cial en­gi­neer­ing that reached its zenith right be­fore the credit crunch and which reg­u­la­tors are now try­ing to out­law.

Speak­ing of reg­u­la­tors, of­fi­cials in Europe are in­creas­ingly aware that their poli­cies are hurt­ing banks. Neg­a­tive in­ter­est rates at the Euro­pean Cen­tral Bank -- pay­ing for the priv­i­lege of hav­ing money there -- can't be passed onto cus­tomers for fear they'll take their de­posits else­where.

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