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Banking Faces an Existential Crisis

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Who would choose to be a banker these days? Your colleagues are disappearing at an alarming rate as your business shrinks. The regulators don't want you doing anything exciting. The public despises you.

And that's only the beginning of your problems. The central banks are killing even your most plain vanilla activities with their interest-rate policies. Every quarter, your industry hands over another couple of billion dollars in fines for previous indiscretions and market rigging. Something called fintech is grabbing the headlines by threatening to disintermediate you out of existence. Your employer feels empowered to defer your bonus for ever-increasing periods of time. And if something bad happens on your watch, you might find yourself paying back years of bonuses or even doing jail time.

Limiting Bank Leverage

Banking is facing an existential crisis. Average Wall Street bonuses dropped 9 percent in 2015, according to the New York State Comptroller. More than half a million banking jobs have been eliminated around the world since the 2008 crisis, according to calculations by my Bloomberg News colleague Yalman Onaran. But it's not just about people losing their jobs or making less money; the contraction should be troubling for anyone concerned with how the finance industry can be an engine for economic growth when it's struggling even to delineate what a bank might look like in five years' time.

Can banks be profitable and economically useful in the current climate? Bill Gross at Janus Capital, writing last week, says that's unlikely:

Instead of historically generating economic growth via a wealth effect and its trickle-down effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects that I have warned about for several years now. Negative yields threaten bank profit margins as yield curves flatten worldwide and bank net interest-rate margins narrow. The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future return on equity will be much akin to a utility stock.

On fintech -- which is broadly the threat that smaller, nimbler, digitally native competitors will steal chunks of the core banking business -- most of the banking industry seems to be whistling past the graveyard. JPMorgan Chief Executive Officer Jamie Dimon asserted last week that banks are "pretty good at using digital technology to make it easier for customers," and that "it will be a challenge for anyone to be better, faster, cheaper than us."

But the effects of increased industry regulation are paltry compared with the challenge posed by fintech, Erste Group Bank CEO Andreas Treichl told Bloomberg Television last week. "We don’t need to be scared of the digital challenge because if we don’t manage to go digital, we’re gone anyway." The longer bankers stay in denial about the chaos fintech might visit upon on their heads, the more at risk they are.

Banks and bankers shoulder a large portion of the blame for where they currently find themselves. Take this example in Germany, where Unicredit's Hypovereinsbank unit is seeking damages of 140 million euros ($154 million) from its former chief financial officer, the former head of investment banking and the ex-chief of private banking. The bank was whacked with fines over a tax scam which played fast and loose with share-ownership and dividend rules to generate ill-gotten gains.

No matter how many lawyers declared the practice legal, no-one involved in the widespread abuse (many other banks were involved in similar system-gaming) could have been under any illusion about what they were up to: dodgy dealing which, at the end of the day, took money out of the pockets of German taxpayers. These kinds of scams are typical of the socially useless financial engineering that reached its zenith right before the credit crunch and which regulators are now trying to outlaw.

Speaking of regulators, officials in Europe are increasingly aware that their policies are hurting banks. Negative interest rates at the European Central Bank -- paying for the privilege of having money there -- can't be passed onto customers for fear they'll take their deposits elsewhere. And for smaller lenders, increased regulation means more bureaucracy, which in turn takes away resources that might otherwise be helping the economy. That's the result of a consultation to assess the consequences of 40 new rules, European Union financial services chief Jonathan Hill said last week.

By now, the big banks probably wish they had been dismembered and broken up piecemeal by the regulators. Instead, they look as miserable as overweight gourmands on a diet of lettuce and water. The laundry list of challenges they face is daunting; market overseers need to be careful that making the post-crash environment safer doesn't also make it toxic.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net