Where is banking headed?
As an investment manager, it’s my job to have an opinion about this. After all, banking and finance represent almost one sixth of the market. In order to have an opinion about the market, you have to have an opinion about the banks.
And right now the banks look like they’re in trouble. The biggest banks—JP Morgan, Bank of America, Wells Fargo, and Citi—have to deal with snarking from wannbe regulators like Simon Johnson who cry, “Break them up! Investigate! Subpoena!” like a modern Cassandra, whose accurate prophesies were destined never to be believed. Only Mr. Johnson doesn’t bother to predict, only to decry.
One thing is certain: countries get the banking systems they deserve. In the US we have Byzantine regulations regarding capital, cash, and taxes. Is it any wonder financial institutions work the system to game these rules? Complex laws breed complex institutions.
It seems to me that the system needs more clarity, not more rules. If taxes and fees are attached to size, institutions will downsize to avoid the cost, but that won’t make them less interconnected or systemically important. We’ll just see more accounting gimmicks like “Repo 105” where a borrowing looks like a sale. Please.
Unfortunately no one seems to understand this. In banking, small may not be beautiful, but simple is safe.
Douglas R. Tengdin, CFA
Chief Investment Officer
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