Death of the Big Bank Model

With the news last week that the federal government will vastly increase its stake in Citigroup (C), we see at last the final collapse of the mega-bank model.

In the U.S., Citigroup has been effectively nationalized -- and Bank of America (BAC) may not be far behind. In the UK, meanwhile, the government has taken over both Royal Bank of Scotland (RBS) and Lloyds.

What do these institutions all have in common? Let’s see:

• They are all massive.

• Their vast business mix makes them mind-numbingly complex.

• They all rely heavily on wholesale funding.

• They are run by CEOs with huge egos.
  
• They have demonstrated that they cannot be managed effectively.

How many times do we have to be shown that these complex, unmanageable banks are doomed? Wall Street cheered every time these companies announced another in their endless string of acquisitions. In reality, virtually every deal destroyed huge amounts of shareholder value—and set the stage for failure on a grand scale.

Is there a solution?

Of course. In non-financial industries, companies that are smaller and more highly focused than the big industrial conglomerates have consistently created more value, at lower risk. More companies like that need to emerge in the banking industry, as well.

The last thing the industry needs is a new set of “financial supermarkets.” Look at what Bank of America’s 30-year run of M&A has resulted in: an institution on the brink. In the meantime, virtually every deal BofA did destroyed huge amounts of shareholder value, hobbled its ability to better serve its markets, and, as we now see, raised the company’s risk profile.

The banking industry’s biggest players need to be broken up and replaced by more mid-sized, focused institutions that have simple business models managements can execute, the market can evaluate, and regulators can understand.

It’s time to go back to the future—and the sooner, the better.

Comments

[Think:]

wow...how shortsided. because banks are massive they're going to fail...it has nothing to do with reckless lending...just the fact that they're TOO big and complex. btw...how many times have we been shown that these banks are doomed?

Mar 03 03:15 AM

[Tradememe:]

Those big banks are financial dinosaurs. They are just not aware of it or they refuse to face up with reality.

Mar 03 03:39 AM

[Rocknbob:]

We certainly do not need 8000 or so number of banks in the US. Consolidate, go bankcrupt, whatever...just dont become a parasite on the American taxpayer ad infinitum....

Mar 03 05:46 AM

[cranyinnyc:]

"They are run by CEOs with huge egos."

gotta love that bullet -you proved the bank doesn't have to be big to be run by a CEO with a huge ego

Mar 03 07:20 AM

[qntn:]

What an idiot this guy is. He wants to got "back to the future". I do not want to go "down town" to cash a check. This guy wants to go "back to the future", I like ATM's and the convenience of bank branches. They were almost non existent "back to the future". I like being able to go almost anywhere in the country and do my bank business. The big banks have let us do this. What about "on-line banking". They did not have this "back to the future". The big banks started many of the new tech advances we have today. Bashers like this bozo are out EVERY DAY. Is this all he could come up with when he was required to wrtie an artilce to get paid. STUPID!

Mar 03 08:22 AM

[philipmax:]

right on!!

Mar 15 12:18 PM

[Terth:]

As a Community Bank lender I whole heartidly agree. If we were in the same situation as the Big Banks we would be shut down. We know our markets, and are able to change direction when the economy changes. The Big Banks and even large regionals need to be sytematically dismanteled.

May 05 05:40 PM