Oliver Kamm Published at 12:01AM, June 11 2015
In Making It Happen: Fred Goodwin, RBS and the Men Who Blew up the British Economy, his grimly gripping account of the lender’s near collapse, Iain Martin describes the globalisation of banking.
Dick Fuld, who later brought down Lehman Brothers, scouted in Europe in the late 1980s for opportunities for the investment bank to expand. He drew the line at Frankfurt in what was then West Germany, however. “No way,” Mr Fuld declared. “We’re never going behind the Iron Curtain.”
Banks’ expansion plans have sometimes suffered from not knowing a local market. Yet even long-established global banks are now retrenching. HSBC is moving out of underperforming countries; it confirmed this week that it would sell its Brazilian and Turkish businesses. Standard Chartered has also been divesting businesses — notably its Hong Kong consumer finance business. Citigroup, the US bank that once stressed its global reach, has in the past ten years exited consumer banking operations in a number of overseas markets.
One market that epitomises the problems is South Korea. HSBC shut its retail business there in 2013, having failed to acquire a local bank. StanChart bought Korea First Bank a decade ago for $3.3 billion, yet has been forced to write down the value of the division.
Finance epitomised globalisation in the great bull market of the 1990s and the early years of this century. McKinsey, the consultancy, estimated in 2013 that cross-border bank flows had amounted to $5.6 trillion in 2007. That shrank to $1.7 trillion five years later.
There is evidence that lending has picked up since, mainly because of financing needs in China. Yet there are good reasons for believing that there is a long-term reversal of the trend to cross-border bank lending, and a scaling back of the idea of global banking powerhouses.
The banking industry is likely to fragment rather than concentrate. That’s probably a good thing for stability, yet there are economic costs, too, and policymakers should try to mitigate them.
There are good reasons for thinking a reversal in bank sector globalisation will have benefits.
First, the scaling back of global bank operations reflects a concern to build up capital strength, a goal stressed this week by Bill Winters, Standard Chartered’s new chief executive. That’s a good thing. The financial crisis of 2007 to 2009 had its roots in an unconstrained credit expansion. Banks themselves became highly leveraged. Then, they had an incentive to deplete their capital reserves and take on more debt to meet the goal, fashionable at the time, of maximising returns on equity. Now, in the face of tougher capital requirements, banks are more likely to divest assets outside their core markets.
Second, the globalisation of banking ensured that a crisis specific to one asset and in one market — sub-prime mortgages in the United States — caused contagion in the advanced economies.
Cross-border flows played a part in stoking asset-price bubbles in some eurozone economies, such as the housing markets in Ireland and Spain. Globalisation wasn’t meant to be like that: the integration of global finance and the development of complex securitised financial products was meant to diversify risk rather than spread it around.
There is a cost, though. Capitalism is tremendously productive, and one reason is the role of banks and capital markets in matching owners of capital with businesses that need it and can put it to profitable use.
When global banks retrench, the mechanism becomes that bit less efficient. Finding the right trade-off between risk control and wealth creation is always inexact. At the moment, and probably for a long time, strengthening the banking system has priority.