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Friday, 6 March 2015

A new Glass-Steagall Act - part 2

This week I had a meeting with a senior banker in which I talked about my recent plea for a new Glass-Steagall Act which separates investment banking from savings and loans. Latter is like a core public utility function in our society. His response was skeptical as it would be like going back in time for many decades when we still had a government owned bank and moreover, he said, such a bank would not earn enough money given current interest (spread) levels and may even need government subsidies. I replied that he just acknowledged my plea. At least in my view.

In 1881 the Dutch government established the Rijkspostspaarbank (National Postal Savings Bank) which was privatised in 1986 and renamed into Postbank. A merger in 1989 with the NMB Bank led to the creation of NMB Postbank Groep, and a further merger with insurer Nationale Nederlanden in 1990 created the ING Group. Source: http://en.wikipedia.org/wiki/Postbank_N.V.

The issue of not earning enough money is also a chicken-egg situation as the combination of immense size, complexity and excessive regulation may even dilute earnings.

On March 3 Triodos Bank announced its 2014 results. Triodos Bank is a small Dutch bank engaged in savings and (mortgage) loans in "politically correct" activities. It has a balance sheet total of some 10 billion, equity of 700 million, net profit of 30 million, and in 2013 some 900 employees. Sources: www.triodos.nl, www.z24.nl. In my view, Triodos proves that plain, simple and profitable retail banking is possible especially when a Return On Investment (ROI) is not the primary concern. 

Rabobank is a large Dutch bank which recently published its 2014 results. Its balance sheet total is near 700 billion, equity is 39 billion, its net results almost 2 billion, and some 48,000 employees. Source: www.rabobank.com. Let's compare the size of Rabobank and Triodos: balance sheet size = 70x, net profit = 61x, employees = 53x, equity = 56x. Remarkably, this simple test shows some economies of scale in employees yet not in net profits. 

Let's take another example: ING which released its 2014 results on February 15. ING Group is slightly bigger than Rabo: its balance sheet total is near 1,000 billion, equity is 58.5 billion, its results almost 1.2 billion, and some 53,000 FTE. Source: www.ing.com. Let's compare the size of ING and Triodos: balance sheet size = 100x, net profit = 40x, employees = 59x, equity = 84x. Again, this simple test shows economies of scale in employees yet certainly not in net profits. 

Even worse: the bigger the bank, the bigger the scandals: insider trading/front running, money laundering, rogue traders losing billions, LIBOR interest rate manipulation, foreign exchange (forex) rate manipulation, and last but not least the upcoming (HSBC) offshore tax evasion scandal.

While the globalisation of banks mirrored the globalisation of its clients, banks neglected one thing in comparison with their global clients: focus. Focus on corporate values as well as focus on activities. A global financial hypermarket is surely not what global clients are looking for.

The globalisation of banks also brought another issue: which government should bail them out? Without political globalisation, banking globalisation was a bridge too far. To date banks seem to be remapping their organisation more or less in accordance with the political jurisdiction in which they operate (e.g., Europe, UK, US). Swiss global banks may end up in a huge problem.