Monday, August 1, 2011

Restructuring Big Banks

The “new” trend amongst the big banks is to cut jobs.

The “big” HSBC has announced that it will be cutting 10,000 jobs in the near future, part of what many analysts expect to be part of a 30,000 reduction in jobs that will occur over time. 

This joins the efforts of other major banking organizations to scale down such at the Swiss banks Credit Suisse which announced earlier that it was eliminating 2,000 positions and UBS which said it was eliminating at lest 5,000 jobs.

In the UK, Lloyds Banking Group stated in June that it was cutting about 15,000 jobs which follows the news that the Royal Bank of Scotland has already dropped 28,000 positions with more to come in the near future.  Goldman Sachs is also cutting staff, as is Barclays Bank. 

Then, of course, there are the European banks in Ireland, Spain, Greece, and elsewhere that are facing massive amounts of restructuring. 

The big banks have had a fifty-year ride becoming over time huge global empires.  They have gone into this business and they have gone into that business without taking a breath in the process.  As “Chuck” Prince, former Chairman of Citigroup said…the music kept playing, so that the dancers had to keep dancing.

Which led to the situation that I discussed in my last post,  “Can Anyone Manage the ‘Too Big To Fail’ Banks?” ( 

A problem associated with this situation is whether of not these “Too Big To Fail” banks can be regulated.  There is, of course, some belief that these banks cannot really be controlled, especially with the advances that are taking place in the world of information technology. (See my “The Future of Banking: Dodd-Frank at One Year”,

The question I asked in the first post mentioned was whether or not their shareholders could significantly influence these large commercial banks so that some control could be established over bank managements to reign in “undisciplined” growth and risk taking.  That is, could market performance become a sufficient reason for shareholder governance in the case of these financial institutions that were deemed “Too Big To Fail”? 

The basic reason given for the reduction in jobs given by the banks mentioned above was that revenue growth had deteriorated and cost cutting was needed to bring return the banks to greater profitability.  

Banks profits rebounded after the financial crisis, first, because of trading profits earned in volatile financial markets, and, second, due to reductions in provisions for loan losses. 

However, the banks have not been able to continue producing higher profits due to these factors and with lending, even at the larger banks, so anemic, managements have had to look elsewhere to beef up margins. 

In my mind, this effort at cost cutting does not answer the fundamental question about the future of the large commercial banks. 

Cost cutting is one, immediate management response that can improve profit margins.  The fundamental question to me is whether or not this cost-cutting is connected in any way with a management effort to restructure an organization so as to make sense establish the economic rationale of the bank and to be able to better manage the risk profile of the bank. 

The concern here is that the cost cutting is tactical and not strategic. 

These large financial institutions have grown almost without limit for fifty years and have added businesses more often than not just to increase the size of the organization and have added risk to their business structure without sufficient knowledge or control of what was being assumed.  Furthermore, many organizations used accounting “gimmicks”, financial leverage, and inadequate risk-taking oversight to achieve reported performance goals, which hid basic structural weaknesses.

The fundamental question has to do with whether or not bank managements are to be held accountable for their poor performances.  Will the focus of bank management’s change? 

Many times a change in the focus of bank management will only occur if there is new leadership of the management team.  In the case of HSBC, Lloyds, and Barclays, there has been a change in the past year.  These “new” leaders are expected to shift the direction of their organizations.  Citigroup and Bank of America have had new leaders in the past two years or so.  Citi has seemingly undergone a significant change in direction although better performance is still in the future.  Bank of America seems to be going nowhere, fast.

HSBC also announced another move that seems more “strategic” in nature.  It has agreed to sell 195 branches in upstate New York to First Niagara bank.  This effort, along with the closing of branches in Connecticut and New Jersey, is part of an attempt to rationalize its branch network, worldwide.  HSBC is also seeking to sell its credit card business.    Other areas of the bank are under scrutiny.

Of course, these moves are only “strategic” if they are more than just the “fad” of the moment.  And, this is the ultimate question.  Cost cutting can be a fad.  Other organizations are doing it so I cannot be criticized for cost cutting since others are doing it. 

This “strategy” can be extended to other efforts that only last until “things start to pick up again.”  That is, this “strategy” will only continue until the music starts to play again and everyone must get out, once again, on the dance floor.

Thus, one can still ask, “Can anyone manage the ‘Too Big To Fail’ banks?”

My view is that it is too early to tell. 

Right now the incentive is to re-trench and re-structure.  However, in man circles, especially in the United States, there is still a lot of pressure for governments to inflate credit.  (Need one mention Paul Krugman of the New York Times, “The President Surrenders”, 

If credit inflation remains the policy of choice of the United States…and others…and continues to dominate the economic scene then I believe that the “fad” will end and the financial institutions will start to dance again.            

If debt deflation dominates, then I truly believe that we will see better management in the financial sector and financial conglomerates will become more rational and risk-taking will be better controlled.  As I have written elsewhere, this is the other side of the process where government provides too much stimulus for an extended period of time, people and businesses respond accordingly, and then, since this situation becomes unsustainable, people and businesses must adjust back to a position that is more sound, economically, and therefore more sustainable. 

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