Giants with nowhere to hide
In a time of fierce competition partly prompted by technological change, commercial banks are struggling hard to make decent margins from traditional business. Diversification into investment banking and derivatives trading has led to as many failures as successes. Suzanne Miller reports on alternative views on how the banks might turn an honest penny.
"Just look out of your window and you can see a banking crisis," David Llewellyn, banking professor of Loughborough University, recently told an audience of financiers in Bangkok. Banks have once again been as surprised as everyone else to find themselves in the thick of a financial crisis, this time in south-east Asia. Have they abandoned customary restraints and become chronically risk-addicted?
Banks that have lent heavily to Asia are being blamed for bad credit decisions and for threatening the very fabric of the financial system. But they are forced by fierce competition to produce attractive returns on capital in ever tighter markets and are likely to argue that they must take risks to safeguard margins.
The days of dependable banking collecting deposits and keeping traditional customers happily in-pocket are a thing of the past. Commercial banks in the US and Europe have been forced to cut costs and branches while diversifying into such businesses as pensions, insurance, asset management and investment banking. For many banks this has caused an identity crisis.
Competition has meant that margins are getting squeezed and that as banks search for more income, risk parameters have broadened.