Smaller yes but more efficient banks?

Related to my previous post here are few ideas from an article in today’s FT (link here for subscribers).

In the article entitled “The coming world of smaller banks” Frank Partony  offers an interesting point on recent dynamics of this sector.


“The numbers are staggering. As of midday on Wednesday, shares of Barclays and Credit Suisse, which announced lay-offs last week, are down more than 20 per cent for the month. Shares of HSBC, which will be making 30,000 redundancies – a 10th of its workforce – are down 17 per cent. Shares of Lloyds, which is cutting 15,000 jobs, are down nearly that much. Other financial institutions, including Goldman Sachs and UBS, have announced job cuts and suffered double-digit share price declines. And then there are Bank of America and Citigroup, the two banks facing the most intense pressure from investors this week; together they employ more than half a million people. For now.

Typically, job cuts are good for shareholders because they reduce labour costs and improve efficiency. But these lay-offs have set off a labour-capital death spiral: they are bad for employees but are proving even worse for shareholders, and the declines in the share prices of banks are putting yet more pressure on employees and will probably lead to more lay-offs. And so on, and so on.

Bank analysts cite several reasons for share price declines, including litigation exposure, declining investor and consumer confidence and a faltering economy. But one overarching factor, which also explains the increase in lay-offs, is the declining importance of banks.”

I would draw your attention the reasons for share price declines. There is nothing about profitability which ironically has been back for most banks.


He then finishes by posing a very interesting question not only for the banking sector. A lot of CEOs these day view the company as their own and take decisions in own interest forgetting that they are only there to represent the shareholder’s interests.

“When my new law students arrive for classes later this month, I will begin with one question: for whose benefit should companies be run? Most for-profit companies are run for the benefit of shareholders. But banks have been run more for the benefit of employees. In the future, banks will face pressure from both groups. They will occupy a smaller place in the economy and they will be less profitable. In a decade, there will be fewer professionals working on Wall Street than there are today. As banks revert to their more limited historical role in capital allocation, they will face hard choices about who to favour: shareholders or employees?

The recent turmoil among banks illustrates a deep irony: although banks are supposed to be exemplars of capitalism, during the previous two decades, bank employees have consistently won the labour-capital battle. As banks expanded, employees extracted most of the gains, like professional athletes demanding their teams’ profits and leaving owners with paltry returns, or even losses. Sports owners will suffer such indignities in exchange for glamour value. But owning a bank isn’t very much fun and future owners are going to play fewer games with smaller teams.”


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