Friday, January 22, 2010

Good bank, bad bank

While financial stocks are reeling in the wake of U.S. president Barack Obama's announcement that he wants to limit the scope and size of banks and their trading activities, their must be mixed feelings amongst banks about this announcement and what it means for certain parts of the bank.

Trading, hedge funds, private equiy and  investment banking look as if they could be the hardest hit particularly as much of the U.S. government's rhetoric is around those banks that have become more than just deposit takers and are indulging in risky trading activity on their own books (and still expecting to be bailed out by the government). According to a article, one White House spokesman said that banks that received a "backstop" from the taxpayer shouldn't be able to make a profit off their own investing."

It goes back to the co-mingling of clients' funds with the banks' money, but as early newspaper reports suggest trying to disentangle one from the other could be tricky unless you clearly separate good old fashioned banking (lending and deposit taking) from proprietary trading. That smacks of Glass-Steagall.

Most banks will be reluctant to separate investment banking or proprietary trading from the rest of the bank and will argue that one feeds into the other in terms of cross-selling opportunities. After all investment banking or proprietary trading, although  high risk, made a substantial contribution to  banks' balance sheets prior to the recent crisis and in its wake.

But what does this mean for the less riskier parts of a bank's business, for example, transaction banking? Does Obama's clampdown on banks mean that transaction banking - which is less volatile and a relatively stable business in good times or bad - will become the most prized of all the banks' businesses?

We are certainly seeing that with the likes of Citi, which has divided itself into "good bank", "bad bank", putting its more core, stable and profitable businesses such as GTB into a separate unit called Citicorp and riskier non-core assets into Citi Holdings. Are other banks going to have to follow this example in order to comply with Obama's requirements? And if they don't is transaction banking in danger of being polluted or fouled by the mistakes or errors of judgement of its riskier investment banking counterparts?

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