News ID: 113272
Published: 0331 GMT March 07, 2015

Global financial giants in trouble

Global financial giants in trouble

Since the 1990s, three kinds of international firm have emerged. Investment banks such as Goldman Sachs deal in securities and cater to the rich from a handful of financial hubs such as Hong Kong and Singapore.

A few banks, such as Spain’s Santander, have “gone native”, establishing a deep retail-banking presence in multiple countries, economist.com wrote.

However, the most popular approach is the “global network bank”: A jack of all trades, lending to and shifting money for multinationals in scores of countries, and in some places acting like a universal bank doing everything from bond-trading to car loans.

The names of the biggest half-dozen such firms adorn skyscrapers all over the world.

This model of the global bank had a reasonable crisis in 2008-09; only Citigroup required a full-scale bailout. Yet it is now in deep trouble.

In recent weeks, Jamie Dimon, the boss of JPMorgan Chase, has been forced to field questions about breaking up his bank.

Stuart Gulliver, the head of HSBC, has abandoned the financial targets that he set upon taking the job in 2011. Citigroup is awaiting the results of its annual exam from the Federal Reserve. If it fails, calls for a mercy killing will be deafening. Deutsche Bank is likely to shrink further.

Standard Chartered, which operates in Asia, Africa and the Middle East, is parting company with its longstanding boss, Peter Sands.

Domestic lenders that global banks have long sneered at are doing far better. In Britain, Lloyds has recovered smartly over the past two years. In the US, the most highly rated banks —based on their share price relative to their book value — are Wells Fargo and a host of midsized firms.

The panic about global banks reflects their weak recent results: In aggregate, the five firms mentioned above reported a return on equity of just 6 percent last year.

Only JPMorgan Chase did passably well. Investors worry these figures betray a deeper strategic problem. There is a growing fear that the costs of global reach — in terms of regulation and complexity — exceed the potential benefits.

It all seemed far rosier 20 years ago. Back then, banks saw that globalization would lead to an explosion in trade and capital flows. A handful of firms sought to capture that growth.

Most had inherited skeletal global networks of some kind. European lenders such as BNP Paribas and Deutsche Bank had been active abroad for over a century. HSBC and Standard Chartered were bankers to the British Empire.

Citigroup embarked on a big international expansion a century ago; Chase, now part of JPMorgan Chase, opened many foreign branches in the 1960s and 1970s.

As they expanded in the 1990s and 2000s, all of these firms concentrated on multinationals, which required things like trade finance, currency trading and cash management. But all expanded beyond these activities to varying degrees and in different directions.

Today, they typically account for only a quarter of sales. Deutsche and StanChart bulked up in investment banking. BNP built up retail operations in America.

At the most extreme end of the spectrum, Citi and HSBC tried to do everything for everyone everywhere, through lots of acquisitions. They sold derivatives in Delhi and originated subprime debt in Detroit.

   
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