John Gapper The financial herd flees from investment banking

Given that financial crises are caused by herd-like behaviour by banks, it is hard to know whether to be encouraged or dismayed by the latest mass shift – away from investment banking and toward retail and commercial banking.

The Bank for International Settlements annual report, published today, finds that one-third of banks that entered the financial crisis in 2007 as wholesale-funded or trading institutions switched to retail banking by 2012 (19 out of the 54 in its sample).

That is not surprising, given the fragility of depending on wholesale funding and high-margin but volatile investment banking, which was revealed in the crisis. Among the high-profile cases of banks altering strategy away from investment banking are UBS and Morgan Stanley.

But the BIS report also shows that the herd-like aversion to investment banking was quite different before the crisis. Some 13 out of 47 institutions that were retail banks in 2005 had broadened their activities by 2007.

As well as the public hostility to investment banking, institutions face lower profitability and scepticism among investors. But retail banks have themselves suffered badly in past crises, such as the debt crisis affecting less developed countries in 1989-1991.

How long will it be before the herd changes direction again?