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Home > Blogs > Anthony Harrington > Dismantling universal banks? Bad idea says Deutsche Bank Research

Dismantling universal banks? Bad idea says Deutsche Bank Research

Dismantling universal banks? Bad idea says Deutsche Bank Research Anthony Harrington

These days with re-regulation of the banking system being enthusiastically supported by governments across developed markets, it is hard to find anyone outside the banking community to raise a voice against more and tighter regulation. However, this hasn't stopped the research arm of Deutsche Bank from roundly condemning the idea of splitting off so called "casino banking" from traditional deposit taking banking operations.

The political dynamics in Europe have shifted against universal banks in recent months. This is a dangerous development that threatens the key role such banks play in modern economies...

It is a familiar refrain from the banking community, which is lobbying long and hard in an effort to avoid the enforced splitting up of big banks. But Deutsche Bank Research (DBR) argues the case in greater detail than it has been put before. DBR points to what it calls "the three key advantages of the universal banking model". These sum up as a broader range of services for customers, lower costs for them and the real economy and greater financial stability for the banks themselves, since they are more thoroughly diversified, with multiple revenue streams. What politicians should be focused on, instead of on the idea of splitting up the banks, is on the implementation of Basel III, the creation of effective restructuring and resolution regimes for banks, and putting in place effective macro-prudential supervision, says DBR.

DBR defines a "universal bank" as one that offers some or all of a broad range of banking services, that include retail, business and corporate banking, services for financial institutional clients, asset and wealth management services, payment services and investment banking. Because banks have a choice in Europe as to how many of these services they offer, universal banks come in a variety of guises, with not every bank, for example, choosing to offer wealth management services, and not every bank opting to get involved in merger and acquisition work, or securitisations.

This development was a natural evolution of banking, with agricultural banks, for example, getting more involved in capital markets operations once their customer base started to become more exposed to the fluctuations of global commodity markets. Once you are dealing for a customer, it becomes very difficult to separate out the hedging activities you undertake for the customer from hedging activities that you undertake to protect your own positions, or even from outright position taking with a view to profiting from FX or commodity price movements as a profit driver for the bank itself.

Go a little further along this road, of course, and you have the situation that the politicians are highly focused on at present. This, of course, is the idea that the proprietary trading arms of universal banks will end up betting the bank on idiotic plays which have no commercial significance for the real economy, and which jeopardize both the bank and its ability to provide a secure home for the deposits of its customers.

DBR points out that universal banks need not be the same as "too big to fail" banks since they come in a variety of sizes. They are superior to specialist banks because they can provide tailor-made financial services, and, because they act as a one-stop shop for their clients, they know more about the customer than a specialist bank and may be able to provide superior advice and a better product fit for the client.

"This may be particularly relevant for clients requiring a comprehensive set of relatively sophisticated (and complex) corporate financial solutions," it argues.

DBR also makes the point that if many countries were to introduce split banking, there would be far fewer universal banks able to use retail deposits to fund loans to corporations or to invest abroad. If a relatively large number of countries went down the road of abolishing universal banks, then this barrier to investing abroad would impede the efficient flow of funds between surplus and deficit countries, DBR claims. Deficit countries could be cut off from international funding and, by extension, cross border adjustment processes could be impeded.

What this says, in other words, is that political actions have unlooked for consequences, and the law of unintended consequences dictates that those unexpected outcomes are usually bad, and often very bad. It's a reasonable argument, but it won't cut much ice with either the general public, who are still outraged by the egregious sins of many of the erstwhile leading lights of the banking community, or with politicians.

Bankers are heavily blamed for causing the 2008 crash and they are not going to get off the hook lightly. We do seem to be edging ever closer to the EU bringing in legislation at some point to split off investment from retail banking and if that happens the consequences will be very far reaching for Europe's banks. In DBR's terms 200 years of evolution in the banking world will have run into a brick wall. From the tax payer's standpoint all this means is that bankers won't be able to indulge in "casino banking", playing fast and loose with depositors funds until they go bust and have to be bailed out with taxpayers' money. What the DBR report is saying is that if and when such legislation comes in, the taxpayer's view of things, which is echoed by the politicians' view of things, may well turn out to be far too simplistic, and the consequences - far from protecting us from failure - may simply create deeper strains elsewhere in the system.

Further reading on bank regulation




Tags: Basel III , Deutsche Bank Research , Glass-Steagall Act , Mergers and Acquisitions , securitization , universal banks
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