The devil is in the detail

A few months ago, we found ourselves visiting with a senior executive at one of the US’s larger banks at their New York headquarters, in part to talk about the world and to catch up on the “industry gossip”. Outwardly, the finance industry – and the financial markets – seem to be doing well at present but when we asked him how the business was going and, more importantly, whether he saw anything that worried him.

His response was “the main thing that worries me is that we don’t want to even be a bank anymore”.

His angst was simply that, following the GFC and the advent of more regulation and ultra-low interest rates, the likely return to investors (and employees?) for being involved within the official banking sector was now minimal; anything that they were supposed to do – such as lend to real people – no longer generated a decent expected return, while anything “interesting” was pretty much forbidden by the regulators who seemed to be knocking on his door at least once a week. 

In this respect, it does seem that the pendulum from unfettered banking in the mid-2000s may have swung rather too far back the other way towards a degree of over-regulation in some areas, as it often does following a major banking crisis. Indeed, we have long wondered whether the well-recognised 60-70-year-long cycle in the global economy is actually created by differing generations of banking regulator: the first generation are ultra-conservative, with the result that the system may be credit constrained; the second generation then eases up, but the third generation tends to be quite laissez-faire with the result that credit booms and busts tend to emerge…