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Banking Trends: End of Big Bank Theory

Barely three years into bagging a job that took 18 years to get, Anshu Jain quit as co-CEO of Deutsche Bank. Reports suggest Jain, a brilliant banker, was upended by his non-German roots, stodgy unions and a mulish board.

Only Jain will know the politics of that. What’s universally accepted, though, is that there isn’t much glory left in presiding over big banks. In the new order, big banks are set to shrink, pare high-risk plays and reduce geographies. Regulators are wrestling them down. Add to that increasing compliance costs, punishing penalties, millennial attitudes and technology disruptions, and it may almost start to look like Jain may have reason to celebrate his departure.

Since the 2007 financial crisis, brought on by the fecklessness of megabanks, banking has shifted — though not in tectonic ways that was initially talked of. Regulators have pushed through small steps resisted by gutsy pushbacks bankrolled by the big money these banks still generate.

Even so, in clampdowns on both sides of the Atlantic, through the revised Basel norms and the watered down Dodd-Frank Act, it’s no longer advantageous to be ‘too big to fail’.

Arecent US Federal Reserve move, for example, requires banks to increase their capital requirements, so that by 2019, the bigger the bank, the higher its capital requirements will be. Fed chairwoman Janet Yellen surmised it as we “would encourage such firms to reduce their systemic footprint”, to lessen the fallout on economies and taxpayers, should they belly-up.

Banks also have to produce documents to prove that their funeral would be easy and not cumbersome on the taxpayer, making it easier to be gone.

The rules have triggered a race to sell assets, be that low-margin gig or unprofitable business. Morgan Stanley has pared its fixed income, UBS no longer has too many people yelling across trading floors, and Bank of America has got rid of large parts of its mortgage and credit card businesses.

In Europe, HSBC just announced that it is shedding smaller clients and cutting another 25,000 jobs, amid gripes that British regulations and bank levies are bad for banking. RBS, star recipient of British dole, is exiting Asian corporate banking.

Investment banking, traditionally a money-spinner for banks, and most certainly what bulwarked Jain’s career, is also losing hold. Trading in equities, bonds and commodities is nothing like the pre-crisis days.

Global economies are still tepid, Europe uncertain, and the ultra-loose monetary policy is unwinding. Robotic algorithms and high-frequency trading, with wafer-thin margins, have shifted the power from a raucous trading floor to smart software on a machine. Then comes the stinging flagellation.

Regulators are pounding banks for transgressions. From Citi, JPMorgan Chase to Barclays, most of the whales have coughed up $10-billion fines for rigging rates. Deutsche, under Jain, has been slapped with a record $2.5 billion for fiddling with interbank rates. All in all, in a series of criminal probes launched by the US and European authorities, it has emerged that the big banks were pretty deliberate in robbing markets and misleading regulators. There was collusion and plenty of it. A transcript from a trader chat room produced as evidence by US regulators reads, “If you ain’t cheatin, you ain’t trying.”

In all of this, the cost of compliance has shot up so much that it’s almost like man-to-man marking in a game of football. Any cost taken out of elsewhere goes into beefing the vigilance departments. So, the days of opaque financial products mis-sold by Gordon Gekko-type characters are getting slimmer, as are high-risk products. Stack all of this up, and bigger banks are finding it hard to improve returns to shareholders.

What’s left of banking is being reshaped by the Millennials, who won’t be going to bank branches to transact and will be more comfortable using banking services provided by firms such as Square and PayPal. Some surveys already point to that.

Silicon Valley has hundreds of startups that will, one day, make complex trading so transparent that the information arbitrage advantage that banks enjoy will disappear. Transaction costs will be a fraction of what they are today and consumers will be able to bypass traditional banks.

The larger banks have the money to invest in technologies, but may find the pace of the disruption too rapid to roll out easily in these behemoths. In short, the banks that robbed millions of Millennials of opportunities with their reckless greed, will be at the receiving end. The top job then will hardly be easy, much less one that’s worth fighting for

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