There was an interesting Comment in today’s US print edition of the Financial Times. It was called, ‘Our Universal Banking Mistake‘ (reported in the Australian) and it was written by John Reed, former chairman and CEO of Citigroup, created by the merger of Citicorp and Travelers Group when a Glass-Steagall was repealed.
Mr Reed poignantly explains how two key issues resulted in the failure of banks to survive the financial crisis, itself triggered by human greed and government policy errors. The two errors of judgment stemmed from the repeal of the act that allowed traditional banking to be merged with investment banking, creating the behemoths we are familiar with. Note that in Europe the Giants are today retrenching due to over regulation while in the US the Giants are actually getting bigger as they gobble up the cut out bits of European banks.
The two issues were that banks assumed there would be cost synergies in merging the two bank styles, and the other concerned mismatches in culture. Reed suggests that cost savings didn’t happen, though some bank leaders may argue the point. The real killer though is the culture point. Traditional banking, that is taking deposits and servicing mortgages, is inherently risk averse. Whereas investment banking is the complete obvious. Reed concludes therefore that we need a new Glass-Steagall. He ends by saying that no amount of regulation, management changes or reorganization will get over the cultural differences. I have to agree.
We can see the fruits of over regulation now. The financial system, a powerful tool, is hobbled. Investments in capital and innovation are not increasing in line with our needs and expectations for economic growth. New requirements for additional capital safety nets won’t actually prevent he next collapse, because you can’t prevent the next collapse. Even Alan Greenspan has said that the ultimate trigger was human greed and thus it can’t be prevented again. So I would remove much of the new regulatory attempts to limit risk, and replace with a simpler more modern Glass-Steagall. That will reduce the impact of risk and partition it to the high risk ready business. We would thus eliminate the ‘too big to fail’ systemic risk that is gutting our financial system today.