The present European banking crisis has led many observers to question the legitimacy of the “jack-of-all-trades” business model successfully developed by French banks.
Many bankers and financiers see this as an absurd question, as this model has allowed banks to develop a diversified approach to risks that allows each division to rely on the strengths of the others: thus merchant banks and corporate and investment banks have been able to rely on the security of the deposits held in their retail divisions as a reliable and low-cost source of funding and to sell structured products to asset management teams. But the banks have also been able to develop a new approach to their corporate business by developing a large number of specific company-oriented products.
In fact, the crisis highlights the systemic risk that would occur today if a first rank banking institution was to go bankrupt – the resulting seismic shock would probably be even greater than the one that followed the collapse of Lehman Brothers. If this happens, regulators will have no choice but to require the banks either to strengthen their equity capital or to sell off some of their activities so as to comply with the regulations – some banks have indeed just decided to do this.
There are other arguments, however, for separating bank business lines. One of these is the risk of conflicts of interest arising from efforts to maximise income, where the more profitable divisions use the distribution networks to sell their products without allowing customer relations managers to question the risk borne in the end by the borrower (whether institutional, corporate, local authority or private individual), as this would throw doubt on the group’s business development model.
A further argument is the wide compensation gap between retail and investment bankers, a scenario that breeds mistrust and suspicion within the bank, breaks team spirit and eventually causes deep rifts within the institution.
Then there is the choice of strategies with a view to optimising the bank’s performance. There is a tendency to opt for high-yield strategies aimed at strengthening equity capital, rewarding the teams responsible for generating these profits and maximising shareholder (or stock option holder) return, strategies that have led many banks to attribute far too much importance to the most profitable, and therefore most risky, operations.
To clarify one point, our aim is not to abolish merchant banks and corporate and investment banks, which have successfully developed innovative products in response to the growing sophistication of risk management, but rather to restore consistency to the banking sector in terms of financial performance, compensation levels and associated risks.
It is up to each one of us, whether shareholder, employee or customer, to choose the bank best suited to our requirements, bearing in mind that those with the biggest profits also incur the greatest risks, and could therefore go bankrupt.
In any country, the shareholders are entitled to ask at the AGM that the company articles of association be amended in order to separate the business lines. Will they assume their responsibilities?
Olivier de Guerre
PhiTrust Active Investors
Investor and Shareholder
41 rue Boissy d'Anglas
75008 - Paris
Tel.: +33 1 55 35 07 55 - Fax: +33 1 55 35 07 50