Saturday, 26 May 2018

Of winners and losers

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SwissInvest strategist Anthony Peters considers the consequences of splitting commercial and investment banking

Anthony Peters, SwissInvest Strategist

I WAS TALKING to one of my IFR colleagues the other day when the subject turned to whether investment banks and commercial banks should be unified or separated. Of course, we all know that the authorities are all humming with the idea of splitting the naughty casino banks (who prey on unsuspecting grannies, drink Champagne for breakfast and only know five letters in the alphabet – B, O, N, U and S) from the virtuous, hardworking lending banks (who support the economy and drive business).

Of course, the “public debate” utterly overlooks the fact that neither the Libor scandal nor the PPI scandal had anything to do with investment banks, but that raising the money to fund the government deficit (and therefore pay for the National Health Service and the educations system) do. But I suppose that those amongst us who work in the financial services sector should by now have become accustomed to living in a world with an opinion of banking driven by political editors and election campaigns.

Anyhow, I recall that when at Barclays Bank International I watched on as Barclays Merchant Bank was merged with Wedd Durlacher, the jobbers, and DeZoete Bevan, the brokers, to create BZW, the first incarnation of what became BarCap.

There was, at the time an overall shuffling of people between the bank and the investment bank and I observed the huge cultural differences. Put simply, investment bankers always looked first what they could make on a deal, whereas commercial bankers asked what they might lose.

But, once merged, the commercial banks found themselves beset with people who wanted to know what they could make – it was commercial bankers trying to behave like investment bankers and not the other way around.

HOWEVER, THERE IS a side of the debate which never gets aired. Do you really think that investment bankers – proper ones – like the idea of being lumped in with cashiers in Much Wenlock and mortgage advisers in Piddletrenthide?

In truth, investment banks have been taken over by the commercial banking sector because their own customers want it that way. Although tying is never actually mentioned and in some countries even illegal, there is no doubt the large corporations expect the provision of balance sheet in exchange for fee-earning business. More precisely, they make it quite clear that there will be no fees until the balance sheet has been opened up to them. This has driven both investment banks and investment bankers to take the 30 pieces of silver from their commercial counterparts in order to do the business they want to.

Investment bankers always looked first what they could make on a deal, whereas commercial bankers asked what they might lose

Please don’t get me wrong, it’s the guests that make the party. The idea of splitting investment banking from commercial banking is not one I object to. After all, I grew up in a world where the two co-existed very comfortably side by side.

BUT WE NEED to understand the consequences of such a decision. Big corporations, for instance, need to realise that cheap balance sheet will be off the menu once the big fee business goes away, and that investment banks will have to price without the myth of ancillary banking business subsidising the relationship. Also, trades will have to be in much smaller sizes commensurate to more modest capital bases.

Quite clearly, if you sever the legs from the body, they will not suddenly begin running on their own. Our industry has developed along the lines it has as much by customer demand as by the choice of the bankers.

In the old and recurring debate as to whether the prostitute is to blame or the punter, the Swedes at least have decided that it is the latter and formulated legislation accordingly.

Most of the rest of the world hasn’t got there yet, so it is no surprise that “casino” bankers have horns and hooves while commercial bankers are kitted out with haloes and wings. However, it would appear that the main beneficiaries of the one-stop banks are the corporate customers who borrow to invest and I can already hear the moaning and groaning that will follow in the absence of easy access to balance sheet, currently subsidised by the mere promise – and I mean promise – of juicy fee income down the line.

Reversing underwriting laws may be easy for the legislators but changing attitudes, especially those of corporate treasurers and finance directors, won’t be. However, the most difficult thing will be to re-teach commercial bankers to ask themselves the appropriate question: “how much might I lose here?”

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