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Opinion

Banks must accept structural change

"The industry doesn’t seem to realize how few friends it has, or that any politician hoping for re-election could not take the banks’ side."

And still, bankers don’t get it.

The banking industry’s first response to the Obama administration’s so-called plan for bank regulation misses the point. It can decry all it likes Obama's flip-flop towards restricting the scope and size of banks as electioneering and not a serious legislative proposal. It can scoff that the plan will falter before Congressional opposition, as the technical difficulty of defining proprietary trading becomes clear.

The industry doesn’t seem to realize how few friends it has, or that any politician hoping for re-election could not take the banks’ side.

It is too early to assess what final form the Volcker rules will take or their impact on banks’ earnings and capital generation. Many senior bankers privately express horror and outrage but their own analysts take a more sober view, pointing out that earnings from prop trading have shrunk in the past two years anyway, as banks concentrated on customer flow. Banks that made up to 20% of their earnings from prop trading in 2006 and early 2007 now derive maybe 5%.

Hiving off private equity and hedge funds would reduce bank earnings but the disposals might help banks rebuild their capital and investors might put a higher multiple on less risky and volatile remaining earnings.

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