The giants of global finance are in trouble
Good--support your local community banks and credit unions.
http://www.economist.com/news/finance-and-economics/21645807-giants-global-finance-are-trouble-world-pain
This model is in trouble for three reasons. First, these giant firms proved hard to manage. Their subsidiaries struggled to build common IT systems, let alone establish a common culture. Synergies have been elusive and global banks’ cost-to-income ratios, bloated by the costs of being in lots of countries, have rarely been better than those of local banks. As a result these firms have all too often been tempted to make a fast buck. Citi made a kamikaze excursion into mortgage-backed bonds in 2005-08. StanChart made loans to indebted Asian tycoons.
Second, competition proved to be fiercer than expected. The banking bubble in the 2000s led second-rate firms such as Barclays, Société Générale, ABN Amro and Royal Bank of Scotland (RBS) to expand globally, eroding margins. In 2007 RBS bought ABN in a bid to rival the big network banks. It promptly went bust, proving that two dogs do not make a tiger. The global giants also lost market share in Asia to so-called “super-regional” banks, such as ANZ of Australia and DBS of Singapore. Big local banks in emerging markets, such as ICBC in China, Itaú in Brazil and ICICI in India, also began to build out cross-border operations.
If mismanagement and fierce competition were problems before the crisis, the regulatory backlash after it has been brutal. American officials have begun to enforce strict rules on money-laundering, tax evasion and sanctions, meaning that global banks must know their customers, and their customers’ customers, if they want to maintain access to America’s financial system—which is essential given that the dollar is the world’s reserve currency. Huge fines have been imposed on StanChart, BNP and HSBC, among others, for breaking these rules.
Bank supervisors, meanwhile, have imposed higher capital standards on global banks. Most face both the international “Basel 3” regime and a hotch-potch of local and regional regimes. A rule of thumb is that big global banks will need buffers of equity (or “core tier one capital”) equivalent to 12-13% of their risk-adjusted assets, compared to about 10% for domestic firms. National regulators increasingly demand that global banks ring-fence their local operations, limiting their ability to shift capital around the world. The cost of operating the systems that keep regulators happy is huge. HSBC’s compliance costs rose to $2.4 billion in 2014, 50% higher than the year before. JPMorgan is spending $3 billion more on controls than it did in 2011.