When Banks got too Big

When did Banks get too Big?

Banks used to be small. Then that all changed. Banks bought each other. Banks got bigger and fewer. The only real kind of bank was one that was global, and carried out every kind of financial transaction you could imagine.

The model where a plethora of smaller banks that specialised on core competences was swept away in favour of the universal bank. How we laughed at countries that retained the former, and encouraged countries that embraced the latter.

The problem for medium and large sized banks was that they were always vulnerable to takeover themselves, and the way to avoid this was to takeover other similar sized banks as well as smaller banks. Takeover deals were geared or leveraged and the amounts involved were based on eye-watering multiples. Fees generated for advisers were also pretty mind-numbing.

Then things changed. Banks started buying other banks, not because it was good for their shareholders, but because governments wanted them to.

Now, no bank will buy another because they’re scared what they’ll find in the closet or underneath the mattress. Market capitalisation has been decimated and shareholders’ funds wiped out. Banks are morphing into civil service departments, with lending strategies and decisions not driven by shareholder value but by government diktat.

Why? Because banks got too big. A bank – however large – still only has one board of directors and one CEO. Yes, sure you can have divisional boards and layers of management but whoever proved that additional, non-productive tiers of managers made banks more efficient or less prone to risk? The rewards for the directors and CxOs became larger, justified by the greater responsibility which in reality they were becoming less and less able to manage.

So, whither now the universal bank? Or maybe, wither?

Hugh Cumberland

Product Strategy Director

BT GFS