Mark Gilbert writes: Some of the world’s biggest banks are starting to acknowledge that size isn’t everything. It’s a welcome development in the effort to solve the “too big to fail problem.” Instead of focusing on the final pair of words as a potential solution (seeking to avert failure by concentrating on capital buffers), rather focus on the first two words (eliminating systemic risk by making the banks smaller). It’s also proof that regulators are succeeding in nudging the world of finance toward a better place
Leading the way is Royal Bank of Scotland, which hasn’t made a profit since 2007 and remains a ward of the state after a $70 billion bailout more than six years ago left it 80 percent owned by the U.K. government. The size of the RBS rescue reflects the sprawling institution it was then; now, the bank is “no longer chasing global market share,” according to Chief Executive Officer Ross McEwan.
JPMorgan Chase, the world’s biggest investment bank, is also going on a diet. Daniel Pinto, who runs its corporate and investment business, said this week that new capital rules may prompt it to cut back on interest-rate trading and the prime brokerage businesses that services hedge-fund managers; it’s also closing branches in its consumer unit as it tries to shave off $2 billion in costs by 2017. And HSBC, Europe’s biggest bank by market capitalization, said this week it will consider “extreme solutions” for divisions that can’t generate sufficient returns on capital as part of a “journey to simplify the firm.”
Both JPMorgan and HSBC are displaying enlightened self-interest. Analysts have deemed both to be candidates for a break-up, either by investors who want to unlock perceived value in splitting retail entirely from investment banking, or by regulators who see the two functions as incompatible. Slimming down is a way of addressing the allegation that they’re too big to manage without executives having to oversee the total dismantling of their own train sets.
Smaller banks are a welcome consequence of regulators tweaking the rules on capital to make some risky activities too expensive to be profitable. While we won’t know for sure whether the too big to fail issue has been resolved until a large institution goes bust, the financial industry is at least moving in the right direction.
