In September 2011, I wrote an article entitled, "So what's going to happen to banks now", highlighting one or two issues facing banks in the context of the ongoing global economic crisis, with the US having had about 430 bank failures, mainly of regional banks, to date since 2008. On reading this article on CNBC yesterday, "Break up the big banks? Why it could actually happen", I revisited the original article and have some new comments about the matter.
"Currently, we believe that the financial service industry is in the 'decline of profitability' part of the cycle that historically would include the break-up of conglomerates,"
This was essentially the point of departure for my original article. However, the difference between my article and the CNBC article is that mine expected banks to divest to a degree in the best interests of risk mitigation and of protecting shareholder returns at this point of the economic cycle (if there is such a thing yet in the context of the 'new normal'), whereas the article is talking about some 'legislative instruction' that would force banks (in the US) to downsize to reduce risk to the economy in the form of the scale of the bailouts required should it all go wrong again.
What is interesting in the article is the idea of breaking the banks down into banks serving particular industry verticals. While I don't support this idea - industry diversification is critical, especially from within a credit perspective - it is true that industry specialisation has a role to play in potentially improved returns, as per a paper I presented at the International Council of Small Business in Halifax, Canada in 2008. Indeed, many banks have specialist areas serving agriculture and infrastructure, so why not specialist areas serving e.g. retail/wholesale and manufacturing for example? Not only will their business customers be happier as a result of having bank staff that truly understand their industry, but the returns attributable to industry specialisation will be higher too, again as per the paper I presented.
Ultimately there are still no proven answers out there in a global context, especially given that the global economic crisis is still in force, especially in Europe, which in turn, probably has an impact on most of its trading partners. While there's still a lot to play out in terms of the global crisis, the scrabble for margins is still alive and well, with retrenchments still playing out at hundreds of banks across the globe. It's not stable yet...
"Currently, we believe that the financial service industry is in the 'decline of profitability' part of the cycle that historically would include the break-up of conglomerates,"
This was essentially the point of departure for my original article. However, the difference between my article and the CNBC article is that mine expected banks to divest to a degree in the best interests of risk mitigation and of protecting shareholder returns at this point of the economic cycle (if there is such a thing yet in the context of the 'new normal'), whereas the article is talking about some 'legislative instruction' that would force banks (in the US) to downsize to reduce risk to the economy in the form of the scale of the bailouts required should it all go wrong again.
What is interesting in the article is the idea of breaking the banks down into banks serving particular industry verticals. While I don't support this idea - industry diversification is critical, especially from within a credit perspective - it is true that industry specialisation has a role to play in potentially improved returns, as per a paper I presented at the International Council of Small Business in Halifax, Canada in 2008. Indeed, many banks have specialist areas serving agriculture and infrastructure, so why not specialist areas serving e.g. retail/wholesale and manufacturing for example? Not only will their business customers be happier as a result of having bank staff that truly understand their industry, but the returns attributable to industry specialisation will be higher too, again as per the paper I presented.
Ultimately there are still no proven answers out there in a global context, especially given that the global economic crisis is still in force, especially in Europe, which in turn, probably has an impact on most of its trading partners. While there's still a lot to play out in terms of the global crisis, the scrabble for margins is still alive and well, with retrenchments still playing out at hundreds of banks across the globe. It's not stable yet...
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