WASHINGTON: Some of the world’s biggest banks are starting to acknowledge that size isn’t everything. It’s a welcome development in the effort to solve the “too big to fail” problem, which thus far has been far too focused on the final pair of words as a potential solution, rather than the first two words. It’s also proof that regulators are succeeding in nudging the world of finance toward a better place.

Leading the way is Royal Bank of Scotland, which hasn’t made a profit since 2007 and remains a ward of the state after a $70 billion bailout more than six years ago left it 80 per cent owned by the British government. The size of the RBS rescue reflects the sprawling institution it was then; now, the bank is “no longer chasing global market share,” according to Chief Executive Officer Ross McEwan.

Thursday, he revealed plans to slash the bank’s geographic footprint, abandoning businesses in 25 countries including China, India and Thailand to leave it operating in just 13 nations. RBS will make “significant” job cuts at its investment bank, which employs something like 18,000 people, and will halve the staff at its US trading division to leave about 1,000 employees there.

JPMorgan Chase, the world’s biggest investment bank, is also going on a diet.

Daniel Pinto, who runs its corporate and investment business, said this week that new capital rules may prompt it to cut back on interest-rate trading and the prime brokerage businesses that services hedge-fund managers; it’s also closing branches in its consumer unit as it tries to shave off $2bn in costs by 2017. And HSBC, Europe’s biggest bank by market capitalisation, said this week it will consider “extreme solutions” for divisions that can’t generate sufficient returns on capital as part of a “journey to simplify the firm.”

Both JPMorgan and HSBC are displaying enlightened self- interest. Analysts have deemed both to be candidates for a break-up, either by investors who want to unlock perceived value in splitting retail entirely from investment banking, or by regulators who see the two functions as incompatible.

Slimming down is a way of addressing the allegation that they’re too big to manage without executives having to oversee the total dismantling of their own train sets. HSBC Chief Executive Officer Stuart Gulliver, whose institution ope­­­rates in 74 countries, has 52 million clients and employs more than a quarter of a million staff, conceded this week that the bad behaviour that’s cost the bank billions of dollars in fines and compensation is almost impossible to stamp out in such an enormous operation.

“It seems to me,” he said, “that we are holding large corporations to higher standards than the military, the church or civil service. Can I know what every one of 257,000 people is doing? Clearly I can’t.”

There is at least one caveat. Smaller bank balance sheets and a reduced appetite for risk-taking mean any sell-off in the bond market might leave investors struggling to offload their investments. Average daily trading in US investment-grade corporate bonds has increased by just 10pc since 2009, even as the size of the market almost doubled; RBS estimates that European corporate bond trading has dropped by about 70pc since 2008.

By arrangement with Washing­ton Post-Bloomberg News Service

Published in Dawn March 1st , 2015

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