Death of the Big Bank Model

Includes: BAC, C, RBS, SKF, XLF
by: Vernon Hill

With the news last week that the federal government will vastly increase its stake in Citigroup (NYSE: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 (NYSE:BAC) may not be far behind. In the UK, meanwhile, the government has taken over both Royal Bank of Scotland (NYSE: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.