Investment banking practices, from unwise loans to the emphasis on derivatives, risk another financial crisis
- Peter Guy says recent disputes in HSBC and Deutsche Bank highlight the banking industry’s disease of risking implosion to focus on big profits
The memo, titled “Global Banking & Markets: Rewards for Persistent Failure”, says: “The division’s leadership has, year-on-year, utterly failed to create a successful strategy. We are entirely fed up and demoralised and have no confidence at all in the existing leadership.”
Watch: The global financial crisis, 10 years on
A merger is a magic pill that would bolster Deutsche’s balance sheet and share price performance, which is trading at around 25 per cent of its book value. Most of all, future bonuses could improve with a stronger capital base to expand business.
This should stand as an indictment of post-financial crisis investment banking culture. Many pundits have been commemorating the 10th anniversary of the global financial crisis, wondering if the crisis could materialise again. Will it be scripted like a Greek or Shakespearean tragedy? As long as human beings are involved in the financial world, their propensity for ambition, folly and evil will drive the historical market swings between fear and greed.
Modern investment banking involves more than just delivering sound advice for clients. Much balance-sheet capital needs to be devoted to win business. In Asia, this could involve making personal loans to a mainland Chinese princeling to win an IPO.
Sources tell me that major banks have made these kinds of loans or “structured financing” to win business over the years. Some of those loans may never be repaid and have been internally shuffled from the investment bank to the private bank, where they are quietly buried away.
Today, it is not realistic to compartmentalise commercial, retail banking, treasury management, IPO, equity and debt capital markets when their risks cut through a global balance sheet day in and out.
Post financial crisis, global banks are still mired in an existential and cultural dilemma. Banks have strayed far from their traditional role as credit institutions and lenders.
They have generated a massive derivatives business that cannot be managed. Shutting it down amounts to financial blasphemy, setting off a crisis of purpose throughout the entire banking industry where so many activities hinge on derivatives.
The traditional banking model was established on relationships rather than transactions. The derivatives charade that banks sustain today through “mark to market” will inevitably return to haunt governments.
And the source of the next crisis is not technological disintermediation, but the intermediation that banks say they must conduct. This exploitation of the risk and duration mismatch versus their (government-insured and guaranteed) deposits remains a perfect formula to privatise profits and socialise losses.
Peter Guy is a financial writer and a former international banker