The biggest global banks, including HSBC, RBS and JPMorgan Chase, are taking drastic measures to reduce their costs — and in most cases their size — in the face of regulators’ efforts to make sure they can be unwound in case of another financial crisis, according to Bloomberg News.
Federal Reserve Chairwoman Janet Yellen testified before the House Financial Services Committee last week that new capital requirements are “causing those firms to think seriously about whether or not they should spin off some of their enterprises to reduce their systemic footprint, And frankly, that’s exactly what we want to see happen.”
U.S. laws like the Dodd-Frank Act and global regulations such as the Basel accords don’t require banks to be broken up, or even for them to spin off assets. But the law says banks should make certain it’s possible to wind them down in a crisis, FDIC Vice Chairman Thomas Hoenig told Bloomberg.
“We’re not going to break you up, but we want you to structure yourself so that your failure doesn’t bring the economy down next time,” said Hoenig. “If you can’t get to that point with your current organization structure, then you should sell assets to get to that state.”
The accounting result of the new capital requirements has been dramatically lower return-on-equity results for the biggest global banks, as they’re being required to replace borrowed money with capital. The combination of new regulations and a slow economy produced an average bank return on equity of 3.3 percent in 2014 for 10 of the largest banks. In 2006, before the financial crisis, it averaged 17 percent, according to Bloomberg numbers. Bank of America and Citigroup haven’t beaten 7 percent since the crisis.
The practical result is that the banks are shuttering operations. Deutsche Bank is looking at cutting back parts of its investment business and selling assets. RBS, which hasn’t been profitable in seven years, is withdrawing from two-thirds of the countries where it operates. HSBC is weighing what it calls “extreme solutions” for some units. (Along with banking regulations, HSBC has also had a hard time with recent regulations to block money laundering and terrorist funding.)
But JPMorgan Chase, the most profitable of the global banks, is pushing back against pressure to radically slim down. CEO Jamie Dimon says his bank’s size is necessary to deliver what its customers want. The bank is already shutting down branches and now charges fees for some institutional deposits, and Dimon said at an analyst event last week that the bank could deliver an additional $18 billion in new revenue and cost reductions, and earn a 15 percent return on tangible equity.