Enforcing the split of banks into their risk-taking capital markets arms and more benign retail and private banking units would be a big mistake, the CBI, which represents major employers in the UK, warned recently. Their fear is that such regulations would knock the UK off its privileged perch in global finance and bankers would be allowed to carry on their activities unhindered elsewhere.
The regulators have a different view, with the Bank of England calling for a split, backed by some leading politicians. This would prevent the growth of juggernauts, judged in the last crisis as “too big” or “too important” to fail. The argument is that the man on the street’s mortgage and savings, alongside wealthy individuals’ investments, could be preserved in stressful times, while allowing structured vehicles – sometimes unethically created by risk-taking speculators – to go to the wall.
The Independent Commission on Banking will make recommendations in April, but whatever happens in London and other financial centres such as New York and Zurich, the industry and major clients of institutions will have their own thoughts. Wealthy customers of UBS, for instance, voted with their feet after the financial crisis, making net withdrawals of more than SFr200bn (E152bn) in the two years following the start of the 2008 crisis. Most of this was due to loss of confidence in the bank. Clients were harbouring concerns that the chaos of the capital markets division would somehow encroach into wealth management, denting the value of their assets. Moreover, some banks, including ING and Commerzbank, have been forced to sell off private banking units to raise funds to repay taxpayer subsidies
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It is a thorny issue affecting the very fabric of the wealth management world, which is divided between those in favour of and against such a change in model. But most commentators believe it will happen, though not with any real immediacy. Ray Soudah, a former high ranking banker with both Citigroup and UBS, and now head of Swiss M&A consultancy, Millenium Associates, believes a split between different banking disciplines is not just desirable, but inevitable. “Few large institutions will remain conducting both investment banking and commercial banking and those with marginal investment banking operations will slim down or sell them,” claims Mr Soudah, previously on record saying that only the strong and large-scale houses will survive on either side of the divide. |
“They will then be able to focus on commercial and domestic quasi-investment banking services in their home country, to protect core clients, until they are finally obliged to totally exit investment banking, which has evolved as a global service handled only by a few majors.” The “Swiss majors” – and he means Credit Suisse and UBS – will escape this trend and maintain multiple product lines, while UK banks are more likely to be sacrificed to the fashion for political and regulatory zeal.
“The split is already happening,” confirms Amin Rajan, CEO of the Create consultancy, citing recent examples of Citi and Morgan Stanley divesting part of their wealth businesses. “However you look at it, investment banks are seen as heavily conflicted and clients are fleeing in droves.”
Yet the interdependence of various banking units in the “integrated” banking model may put the brake on an accelerated carve-up. The likes of BNP Paribas and Credit Suisse, for example, always state the advantage of having an investment bank in the same structure as the private bank. It is no secret that in many banks, private banking clients have been seen by bosses as little more than a distribution outlet for structured products.
“Each feed off the other, so it is difficult for them to operate as stand-alone units. The demand for structured products has been artificially propped up but this is an unhealthy relationship,” admits Mr Rajan. “It will be at least 10 years before any significant decoupling will occur. In the meantime, there will be more talk and less action.”
Periodic mutations
This current, volatile era in the evolution of banking is just the beginning of one of the industry’s periodic mutations, believes Shelby du Pasquier, a prominent financial services lawyer at Lenz & Staehelin in Geneva, who has been closely involved in Switzerland’s negotiations with US authorities about tax, confidentiality and the future of Swiss banks’ quest for a lucrative, North American clientele.
While he agrees pressures on existing models are both commercial and regulatory, he expects wealth management rather than capital market operations to bear the brunt of changes, with banks increasingly seeking tax compliant onshore clients, rather than offshore customers, who no longer enjoy the confidence of regulators or operations bosses. “Offshore clients will increasingly be seen as a legacy issue and even a liability, rather than a source of profits,” he believes.
