The debate on bank reform has reached a curious moment. In one half of the conversation, regulators are discussing how to make banks safer for society. In the other half, equity investors are discussing how to make banks safer for their portfolios. If you put the two halves of the debate together, you soon realise that the regulatory conversation is topsy turvy – at least in one crucial respect.
The regulatory discussion generally presumes that “reasonable” reform must leave banks intact. Breaking up too-big-to-fail lenders would do violence to the private sector; by contrast, demanding that banks raise extra capital is a market-friendly way to avoid taxpayer bailouts. But the actual conversation in the markets inverts this presumption. Among equity investors, breaking up banking behemoths is increasingly regarded as desirable; by contrast, boosting banks’ capital is anathema. If a “reasonable” reform is one that goes with the grain of preferences in the market, busting up the banks may actually be more reasonable than forcing them to hold capital they absolutely do not want.
It is easy to see why investors are eager to dismember the big banks. The promises of synergies trotted out by empire-building bosses in the 1990s have proved largely empty; clients don’t necessarily want to buy underwriting or wealth management services from the same supermarket that provides their ordinary loans. Meanwhile, the risks in empire building are evident. If even the respected JPMorgan Chase can lose billions on a sloppy trade in one wayward outpost, then imperial overstretch is everywhere. “Banks are increasingly regarded as unanalysable and uninvestable,” says Mike Mayo, an analyst for CLSA on Wall Street.