Opinion
Weight of Reforms Forces Banks to Pick Their Battles
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Essentially, the banks have faced ever-moving regulatory goalposts on both sides of the Atlantic.
By Roy C. Smith and Brad Hintz
Seven years after the financial crisis, global capital market banks have largely achieved compliance with tough new capital standards. However, the economic damage to their businesses in doing so has divided the industry into survivors, committed to strategies that are likely to succeed in a permanently changed world, and laggards that have lost their way.
The banks have been forced to double the amount of capital held in reserves, cut leverage by half and adapt to a regime of stress tests, living wills, “systemic risk profiles”, new “capital cushions” and liquidity reserves. All of these measures have pleased the banks’ bondholders, who are happy to see the “fortress balance sheet” boasted of at JP Morgan by chief executive Jamie Dimon become an industry standard.
However, the cost of this achievement has been a form of death by a thousand cuts for equity holders and a division of the industry into survivors and those banks whose strategies are floundering. The survivors will eventually be able to use their market share, changing business mix and pricing power to deliver satisfactory returns but the laggards, with ROEs well below their capital costs since the crisis, need to soon rethink their futures.
Read full article as published in Financial News
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Roy C. Smith is the Kenneth G. Langone Professor of Entrepreneurship and Finance and a professor of Management Practice. Brad Hintz is an adjunct professor of Finance.
The banks have been forced to double the amount of capital held in reserves, cut leverage by half and adapt to a regime of stress tests, living wills, “systemic risk profiles”, new “capital cushions” and liquidity reserves. All of these measures have pleased the banks’ bondholders, who are happy to see the “fortress balance sheet” boasted of at JP Morgan by chief executive Jamie Dimon become an industry standard.
However, the cost of this achievement has been a form of death by a thousand cuts for equity holders and a division of the industry into survivors and those banks whose strategies are floundering. The survivors will eventually be able to use their market share, changing business mix and pricing power to deliver satisfactory returns but the laggards, with ROEs well below their capital costs since the crisis, need to soon rethink their futures.
Read full article as published in Financial News
___
Roy C. Smith is the Kenneth G. Langone Professor of Entrepreneurship and Finance and a professor of Management Practice. Brad Hintz is an adjunct professor of Finance.