Ex-Citigroup CEO John Reed writes in the FT that “we were wrong” about the repeal of Glass-Steagall. First “was the belief that combining all types of finance into one institution would drive costs down — and the larger the institution the more efficient it would be. We now know that there are very few cost efficiencies that come from the merger of functions — indeed, there may be none at all. It is possible that combining so much in a single bank makes services more expensive than if they were instead offered by smaller, specialised players.” And, he says, “we were wrong about has to do with culture — and this turns out to be very serious. Mixing incompatible cultures is a problem all by itself. It makes the entire finance industry more fragile.”
Hardly a week goes by without headlines blaring another restructuring by a big European bank, or the replacement of its management. Deutsche Bank and Barclays are the latest to announce big changes. They follow UBS, Standard Chartered, Royal Bank of Scotland, Credit Suisse and more.
The cause of all this turmoil is the banks’ quest for a formula that will enable them to return to the pre-2008 financial crisis glory days of global reach and big profits. But there is no such formula. The destination will prove unreachable and the quest unfulfilled.
The main reason for this is not that economic growth remains subpar, or that regulation has become more onerous (important though these factors may be). Rather, the trouble stems from a perilous cultural balancing act at the core of European banking: how to manage and profit from their high-risk, high-cost investment banking and trading businesses. In short, the universal banking model is what is really at stake in the search for the right mix of management and operations at banks in Europe and, indeed, in the US.