Daily Management Review

American banks unite to save money


Goldman Sachs, Morgan Stanley and Bank of America are planning to set up a joint venture to share trade processes and ideas.

Rob Young via flickr
Rob Young via flickr
Since the financial crisis, the largest US banks have cut costs by more than $ 40 billion, and this is only the beginning. After Donald Trump’s victory, prospects for the financial industry have improved significantly, but many banks are still thinking about ways to further reduce costs. Thus, the "Project Scalpel" is aimed at reducing administrative and operational costs associated with processing information on transactions in the stock and bond markets.

Negotiations on the project are still at the initial stage, and, according to some reports, involve the largest US banks, including Goldman Sachs, Morgan Stanley and Bank of America. If the idea is approved, the financial institutions will create a joint venture to share practices of trade processes and technologies. This will help save at least $ 2 billion a year.

In the past, banks were proud of their ability to effectively conduct transactions, consolidate transfer of ownership, pay dividends and interest payments, and considered it to be their competitive advantage. All these processes have been automated by now. As a result, each bank has departments that perform the same functions. A single system will eliminate unnecessary duplication, cut costs and simplify the modernization process. In addition, it will free up resources needed for profitable investments. Alas, not without a number of problems. First of all, they include issues of information protection and distribution of shares in the enterprise. In addition, it is not yet clear whether to rely on existing technologies or create a new one.

Some banks fear that a single service provider will eventually gain too much influence and be able to dictate its terms (unilaterally increasing fees). Despite the obstacles, the banks have been cooperating for decades in various fields, such as uniform payment systems and clearing houses. The new project marks a transition to a new level of cooperation and emphasizes that the financial industry remains concerned about cost cutting. Since 2009, six of the largest US banks have eliminated more than 100 thousand jobs, abandoned the less attractive business lines and lowered wages. All this indicates a period of stagnation on Wall Street. Revenues of banks suffer from strict capital requirements, weak economic growth, ultra-low interest rates and a fall in trade volumes.

Recently, European banks, including Barclays and Société Générale, said they are working with technology providers to outsource certain transactions to third-party companies. According to Broadridge Financial Solutions, the financial industry spends more than $ 24 billion a year to process trade transactions. The new joint venture will allow the banks to dismiss or redirect thousands of employees. As a result, only risk managers, programmers and traders engaged in execution of the transactions themselves will remain in the ranks. 

However, it is not easy to organize a joint venture with participation of competing banks. A few years ago a group of banks tried to create a similar operator with participation of Depository Trust & Clearing Corp. clearing house. Negotiations failed because of differences in views on the final product and the technology underlying it.

Services. In the past, banks have already worked on combining the functions of the back office. In the 1970s, the Clearing House Depository Trust & Clearing Corp was created to optimize and automate the process of accounting transactions. At present DTCC daily processes securities transactions for many trillions of dollars.

source: wsj.com