The Troubled Future of Global Banking

It seems clear, based on what we have seen in the aftermath of the financial crisis of 2008, that all of the large banks will have to change to survive as viable financial service enterprises. The new regulatory regime has brought the era of banks as growth stocks to a close. A different business model will have to be discovered, one that can satisfy investors with a lesser growth rate, but more efficiency, fewer trading losses and litigation settlements, and greater predictability and dividend growth. The banks will also have to recognize that increasingly the function of financial intermediaries is to process transactions efficiently for clients, an activity that depends much more on technology and organizational management than on star-power deal making. Reorienting banks to such an axis will reduce compensation demands, free up capital from trading books and enable banks to enjoy more breathing room for marketing, product development and automation. In so reorienting, banks will realize that the requirement of transaction processing are very different from those of capital market new issues and proprietary trading and investing thus justifying a sale or spin off of these more traditional investment banking activities. Regulators must also realize that their extraordinary intervention after 2008 has affected free markets for capital services, raising the cost of, and diminishing access to capital by those who need it for economic activity. The regulatory intervention was very imperfect – coming quickly, without cost-benefit analysis or a full understanding of the consequences to financial markets. Regulators should recognize that they will need to repeal some of the more costly and less useful parts of the tough new regulatory regime to preserve the good health of the financial services industry