The Bankwatch

Tracking the consumer evolution of financial services

Undercurrents in western banks today signal a shift back to basics banking

These words from Merkel in reference to the markets forcing the politicians to in effect shore up the markets is exactly the kind of unintended consequence that I expected to happen when I wrote the Great Unwinding posts.

Merkel defies pressure on debt crisis |

“Politics cannot and will not simply follow the markets,” Germany’s chancellor said, repeating her refusal to countenance funding indebted nations with a bond guaranteed by all members of the single currency bloc.

“The markets want to force us into doing certain things, and that we won’t do,” Ms Merkel said, shrugging off last week’s gyrations in equity and bond markets.

And no its not a question of being far-sighted. It is simple mathematics and accounting and it is all about the banks of the world who have most to lose when it comes to sovereign risk as significant bond holders especially in Europe. 

The core issue is de-leveraging by consumers in weak economies.  They have too much debt, and worse their job prospects in the developed countries are not strong. 

With that backdrop, Banks are beginning the process that will see them fork into one of two models in my view:

banks and financial services will be offerred through two broad service models:

  1. Financial utilities – significant operating restrictions in light of implicit and explicit government guarantees underpinning the business
  2. Risk takers – not clearly defined as yet – will be dependent on regulation applicability

It is a well known fact that corporations worldwide are sitting on trillions of spare cash ready to invest it.  This is not the case with banks who are cutting workforces in unprecedented numbers.  Those cuts are not even the beginning.  Banks are too big and spread out across diverse and unreliably profitable ventures.  They made it through the 2007/8 financial markets freeze but now realise that their paternal support from their home governments in the future is in jeopardy. 

Banks with large investments in people and developed countries can see the future growth prospects are moderate at best and the wildly successful profits of the early 2000’s are not on the horizon.

The smart ones will seek to optimise customer and product acquisition using modern technology not building more old style branches.  Bank of America which came through the crisis the worse for wear is insisting it will not go to the market for additional capital, but rather is focussed on Project New BAC.  I will be surprised if that project is not something significant and some new thinking along these lines I proposed here.

Relevance to Bankwatch:

We are likely seeing that shift to ‘Back to Basics’ banking.  This infers a close look at all the patchwork of business models that universal global banks have taken on and reassessing their value particularly in view of the capital allocated to those models. 

This capital allocation assessment takes on unprecedented importance when the attraction of high value growth in the developing countries is held up as an alternative.

Written by Colin Henderson

August 21, 2011 at 15:55

Posted in Uncategorized

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