Home' Trinidad and Tobago Guardian : March 8th 2015 Contents SBG14 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MARCH 8 • 2015
Only pop music and
globalisation more eager-
ly than banks did. Since
the 1990s three kinds of
firms have emerged.
Investment banks such
as Goldman Sachs deal in securities and cater
to the rich from a handful of financial hubs such
as Hong Kong and Singapore. A few banks, such
as Spain s Santander, have "gone native," estab-
lishing a deep retail-banking presence in multiple
The most popular approach, however, is the
"global network bank," a jack of all trades, lending
to and shifting money for multinationals in scores
of countries, and in some places acting like a
universal bank doing everything from bond-trad-
ing to car loans. The names of the biggest half-
dozen such firms adorn skyscrapers all over the
This model of the global bank had a reasonable
crisis in 2008-2009, with only Citigroup requiring
a full-scale bailout.
It is now in deep trouble, however. In recent
weeks Jamie Dimon, CEO of JP Morgan Chase,
has been forced to field questions about breaking
up his bank.
Stuart Gulliver, the head of HSBC, has aban-
doned the financial targets that he set upon taking
the job in 2011. Citigroup is awaiting the results
of its annual exam from the Federal Reserve. If
it fails, calls for a mercy killing will be deafening.
Deutsche Bank is likely to shrink further.
Standard Chartered, which operates in Asia,
Africa and the Middle East, is parting company
with its longtime CEO, Peter Sands.
Domestic lenders at which global banks long
have sneered are doing far better. In Britain Lloyds
has recovered smartly during the past two years.
In America the highest-rated banks, based on
their share price relative to their book value, are
Wells Fargo and a host of midsized firms.
The panic about global banks reflects their
weak recent results: In aggregate the five firms
mentioned above reported a return on equity of
only six per cent last year. Only JP Morgan Chase
did passably well. Investors worry that these fig-
ures betray a deeper strategic problem. There is
a growing fear that the costs of global reach, in
terms of regulation and complexity, exceed the
It all seemed far rosier 20 years ago. Back then
banks saw that globalisation would lead to an
explosion in trade and capital flows. A handful
of firms sought to capture that growth.
Most had inherited skeletal global networks
of some kind. European lenders such as BNP
Paribas and Deutsche Bank had been active
abroad for more than a century.
HSBC and Standard Chartered were bankers
to the British empire. Citigroup embarked on a
big international expansion a century ago, while
Chase Manhattan, now part of JP Morgan Chase,
opened many foreign branches in the 1960s and
As they expanded in the 1990s and 2000s,
all of these firms concentrated on multinationals,
which required things such as trade finance, cur-
rency trading and cash management. All expanded
beyond these activities to varying degrees and
in different directions, however, and today they
typically account for only a quarter of sales.
Deutsche and Standard Chartered bulked up
in investment banking. BNP built up retail oper-
ations in America. At the most extreme end of
the spectrum, Citi and HSBC tried to do every-
thing for everyone everywhere, through lots of
acquisitions. They sold derivatives in Delhi and
originated subprime debt in Detroit.
This model is in trouble for three reasons.
First, these giant firms proved hard to manage.
Their subsidiaries struggled to build common
IT systems, let alone to establish a common cul-
ture. Synergies have been elusive and global
banks cost-to-income ratios, bloated by the
costs of being in lots of countries, rarely have
been better than those of local banks.
As a result these firms have all too often been
tempted to make a fast buck. Citi made a kamikaze
excursion into mortgage-backed bonds in 2005-
2008. Standard Chartered made loans to indebted
Second, competition proved to be fiercer than
expected. The banking bubble of the 2000s led
second-rate firms such as Barclays, Societe Gen-
erale, ABN Amro and Royal Bank of Scotland to
expand globally, eroding margins. In 2007 RBS
bought ABN in a bid to rival the big network
banks. It promptly went bust, proving that two
dogs do not make a tiger. The global giants also
lost market share in Asia to so-called "super-
regional" banks, such as ANZ of Australia and
DBS of Singapore. Big local banks in emerging
markets, such as ICBC in China, Itau in Brazil
and ICICI in India, also began to build cross-
If mismanagement and fierce competition
were problems before the crisis, the regulatory
backlash after it has been brutal.
American officials have begun to enforce strict
rules on money-laundering, tax evasion and
sanctions, meaning that global banks must know
their customers, and their customers customers,
if they want to maintain access to America s
financial system ---which is essential, given that
the dollar is the world s reserve currency.
Huge fines have been imposed on Standard
Chartered, BNP and HSBC, among others, for
breaking these rules.
Bank supervisors, meanwhile, have imposed
higher capital standards on global banks. Most
face both the international "Basel 3" regime and
a hodgepodge of local and regional regimes. A
rule of thumb is that big global banks will need
buffers of equity, or "core tier one capital," equiv-
alent to between 12 per cent and 13 per cent of
their risk-adjusted assets, compared to about 10
per cent for domestic firms. National regulators
Global Banks: A world of pain
Continued on Page 15
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