At last, is boring banking making a comeback?

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Do the almost simultaneous announcements this month of a new regime at Deutsche Bank, and an extensive restructuring at HSBC, symbolise a fundamental change in the structure of financial companies?

The last two decades of the 20th century saw the rise of integrated financial conglomerates. In Britain, the trigger was the Big Bang in 1986. In the US, the separation of investment and commercial banking imposed in the 1930s by the Glass-Steagall Act was steadily eroded. The universal banks of continental Europe, seeing these trends, reinvented themselves along Anglo-Saxon lines.

 In Britain, the very large financial resources of retail banks meant that they were initially dominant operators, absorbing the partnerships that had dominated stockbroking, market making and investment banking. Few of these acquisitions worked out well. Stockbrokers, jobbers and corporate dealmakers did not much enjoy the culture of the retail bank. Many former partners in these firms, made very wealthy through the sale of their businesses, preferred to spend more time with their families. The revenue earners below, deprived of the opportunity to enjoy the icing on the cake, were unhappily nicknamed the “marzipan layer”.

Despite these initial failures, dealmaking continued apace. In 1998–9 Sandy Weill created Citigroup, largest of all financial conglomerates. Mr Weill led the charge to secure the final repeal of Glass-Steagall, and ejected his co-chief executive John Reed, a career retail banker in traditional mould.

The balance of power within financial conglomerates had changed. Dealmakers, greedier and smarter, took control. In investment banks the traders, rather than the corporate suits, were in charge. Trading was believed to be the major source of profits, and power followed. The worries of the marzipan layer were dispelled by the large bonuses that they received as part of these big corporate organisations. But Mr Weill’s triumph was the crest of the wave. Reputational issues began to dog his creation.

The culture of retail banking, intrinsically bureaucratic, perhaps boring, driven by the routinisation needed to allow the accurate completion of millions of transactions every day, was incompatible with the entrepreneurial, buccaneering environment of the investment bank. The association provided opportunities for cross-selling. Informational advantages were derived from engaging in multiple roles. But the main logic was financial; the cross subsidy made possible by a passive deposit base guaranteed by the taxpayer.

While these apparent synergies might yield private advantage for banks, this was offset, and generally more than offset, by the costs to customers and taxpayers. This downside would become all too apparent as mis-selling and conflicts of interest were exposed, and taxpayer support was demanded. Within a decade Citigroup had to be bailed out.

Patrick Jenkins and guests discuss whether bank rebranding works as HSBC considers reviving its Midland brand, the state of Greek banks as tensions rise between Greece and its creditors, and liquidity rules and pending problems in the markets.

But there was little immediate change. When the music stopped for Chuck Prince at Citigroup, investment banker Vikram Pandit took his place. The elevation of Bob Diamond to the chief executive slot at Barclays and of Anshu Jain to the same position at Deutsche Bank was yet to come.

And yet, seven years later, it seems that change may be beginning. The respected central banker Axel Weber went to UBS to slim down its investment banking activities. When Mr Diamond was fired from Barclays, and Mr Pandit from Citigroup, they were replaced by institutional lifers with experience of traditional banking. Now Mr Jain has lost his post at Deutsche Bank. HSBC has told shareholders that ahead of government-imposed ring fencing of its UK retail banking operations, it will rebrand these activities; it may not be long before they are hived off.

Perhaps, not before time, boring banking is starting to make a comeback.

 

This article was first published in the Financial Times on June 17th, 2015.

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