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). Read more
“If you see a Swiss banker jumping out of a window, follow him. There is sure to be a profit in it,” Voltaire is once said to have remarked. These days, no action by a Swiss banker should be taken on trust.
If you wait around long enough, you will observe another retreat by Nomura from trying to transform itself from a dominant retail stockbroker in Japan into a global investment bank.
The latest example comes after an insider trading scandal that led to the replacement of its senior executives. Nomura is already signalling clearly that it is turning its back on the latest expansion, which dates from 2008.
This time, Nomura tried to use the acquisition of the Asian and European operations of Lehman Brothers to march on to the global stage. However, it has not come to much more than its experiments with US commercial real estate securitisation in the 1990s and sub-prime mortgages in the 2000s. Read more
The Moody’s downgrade of 15 banks is a backward-looking review of the strategy that has dominated global banking for the past two decades – expanding into high-margin capital markets operations. It does not get good marks.
There was always a problem inherent in banks such as Deutsche Bank, Barclays, UBS, Bank of America, Credit Suisse and others trying to play in the investment banking world. Yet it took a very long time for a penalty to be applied.
Of course, the question is why it wasn’t applied earlier. Many of the things that Moody’s writes about in its note accompanying the downgrades were evident a long time ago – high volatility came with high margins. Read more
Lloyds Banking Group’s decision retrospectively to reduce the 2010 bonuses of senior executives involved in mis-selling loan insurance is a sign of the increased risks that bankers are starting to face personally.
The move strikes me as appropriate: it is an effective sanction against bankers over-selling high-margin products that will earn them big bonuses but turn out to be bad for customers. But the implications for the individuals involved, and for the industry as a whole, are serious.
It has the effect of turning “bonuses” – a form of profit-sharing that most investment bankers have come to rely on for most of their income – into actual bonuses. In other words, provisional payments on which no individual can depend.
The fact that bonuses may be clawed back will make it much more risky to spend them on property or other things. Logically, they now ought to be kept in savings or shares for at least three years while there is a possibility they could be taken back. Read more
The most breathtaking aspect of Jon Corzine’s prepared testimony to a Congressional committee on the collapse of MF Global is his claim to know little about clearing and settlement.
Mr Corzine’s defence for the missing funds at the commodities broker that he formerly headed is ignorance – that while he knew quite a lot about trading, he left the back office responsibilities to others.
He thus did not know about the missing funds at MF Global until the Sunday night of the weekend when he was trying to strike a deal to rescue the firm. Read more
Given the recent history of UBS, it is fair to ask if Kweku Adoboli is a rogue trader or his employer is a rogue bank.
At one level, Mr Adoboli might appear to fit neatly into the stereotype of the rogue trader, a phenomenon that recurs so often that it is an endemic aspect of modern investment banking. He is young, fairly junior and works on a desk that combined proprietary position-taking with “flow trading” in customer orders.
The latter has in the past allowed rogue traders such as Nick Leeson of Barings and Jérôme Kerviel of Société Générale, to conceal losses while appearing to be doing what their employers wanted. Mr Adoboli has been arrested but not charged, let alone convicted, so he has the presumption of innocence. Read more