Big banks see the need to shrink – but face a path full of obstacles

Fri Feb 19, 2016 1:35am EST
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By Olivia Oran and Anjuli Davies

NEW YORK/LONDON (Reuters) - When the U.S. Federal Reserve's newest policymaker Neel Kashkari dropped a bombshell with a call to break up big banks on Tuesday, it was met with a predictably indignant response from their lobbyists. One described his comments as "blind." But while no one in the executive suites of major global banks would want authorities to force them to split up or downsize, many top bankers acknowledge that their institutions might be better off smaller and simpler. They just worry that any major restructuring could go all wrong because of the way post-financial crisis regulations are applied.

In interviews with Reuters, six senior bankers said they are struggling with the costs and restrictions they face as a result of new regulations, as well as a weak global economy and troubled financial markets. The bankers, who are or recently were in positions ranging from business division head to CEO, spoke on the condition of anonymity so they could be candid without upsetting regulators or investors.

"Fundamentally, the business has to change," said one veteran banker who was on the executive committee of a major European bank until recently. Big banks' shareholder returns have sunk "too low," he said.

These problems are not new, but they have fresh relevance as Deutsche Bank AG (DBKGn.DE: Quote) confronts questions about its capital adequacy, Barclays PLC (BARC.L: Quote) faces pressure to break up and CEOs of big U.S. banks struggle with a loss of investor confidence in their stocks.

(For a graphic of U.S. banks' price-to-book ratios, see

Management teams in the U.S. and Europe are now taking a hard look at dramatic business model changes, but none of the options are particularly attractive, the bankers said.

Merging to cut costs and improve margins is out of the question, given the hurdles banks would likely face from regulators who do not want "too-big-to-fail" institutions getting any bigger. Splitting apart is complicated by capital requirements that would make standalone trading businesses economically unfeasible — and by the fact that there are few, if any, buyers for the assets banks want least.

Some top bankers say they are left with little choice but to muddle through what they fear will be a long, dark period of weak earnings, angry shareholders and gradual shrinkage.   Continued...

A 'Wall St' sign is seen above two 'One Way' signs in New York August 24, 2015. REUTERS/Lucas Jackson