Daily Management Review

Why banks are terrified of the future


Head of JPMorgan Chase, James Dimon, whose bank ousted Citi from the top of the list of financial giants, recently said that he is primarily an American patriot and only then a bank manager. Yet, his strategy, in which international markets occupy an important place, hardly reflects this position.

Nevertheless, Dimon refused several major foreign purchases before and during the financial crisis. His impeccable reputation, perhaps, relies more on these failed trades than on those that have occurred.

Citi, in turn, is rapidly getting rid of its foreign assets. Today, the bank is conducting commercial activities in only 19 countries, compared with 50 in 2007. The reduction is likely to continue. Bank of America has long justified its name, because it is fully concentrated in the domestic market.

A similar process is observed in Western Europe. On August 22, consulting firm McKinsey unveiled statistics that show how global banking has changed in the last ten years.

Thus, leading banks in Switzerland and Great Britain reduced their foreign activities (loans, guarantees, etc.) by one third, while the number declined by 50% for financial organizations in the rest of Europe. Even the volume of trade with settlements in foreign currency, after a long growth, went down.

The declining trend is particularly sharp and significant in correspondent banking, which is traditionally considered the first level of financial support for world trade. Correspondent links between banks in different countries were especially important for companies in places without global banks, as it helped finance imports and exports. The number of correspondent relations has been steadily declining since 2011, McKinsey states.

It's easy to explain why this happens. Correspondent relations in the past were seen as a reliable way for a bank to conduct business in a country that it did not know well.

Then it became a source of vulnerability: the bank became responsible for any transaction, even if it was only a link in a long chain.

Increasing costs for compliance with the rules for combating money laundering and financing of terrorism, as well as losses from economic sanctions, led to an expected massive withdrawal from foreign markets, British magazine The Economist writes.

It is more difficult to understand a study of the Bank of England and the National Bureau of Economic Research of America, which found a long-term correlation between the growth of capital adequacy requirements and the reduction of cross-border lending. McKinsey notes that the rules adopted to ensure liquidity, especially in a crisis, are easier to follow if the money is closer to home.

At the same time, Canadian banks that have relatively successfully survived the financial crisis now have half of their assets abroad; 10 years ago this figure did not exceed 38%.

Foreign assets of Chinese banks, barely noticeable ten years ago, have reached more than $ 1 trillion by today. The banks of Japan, India and Russia are also rapidly expanding their presence in foreign markets.

Such a geographic shift may persist in the next few years. Similar trends were observed in the past, but they, as a rule, unexpectedly and sharply changed in the opposite direction.

The Chinese government recently expressed concern about some foreign acquisitions of Chinese companies, pointing out possible problems in the future.

The change in the current policy of Western banks will largely depend on the regulators. So, for example, the issue of servicing correspondent accounts is still being discussed within the US government. The State Department wants the banks of America to bring other countries, especially the poor, into the global financial system.

The Ministry of Finance, focused on verifying illegal actions, is more cautious. Banks, most likely, will continue to hold a wait-and-see position until the situation becomes clear. 

source: economist.com