FT.com
Bank shareholders are looking unstoppable. They have just claimed another small victory after Sir Michael Rake – the BT chairman and Barclays board member who was being pushed by the bank as the best man to succeed Marcus Agius as chairman – withdrew from the race.
Sir Michael’s decision followed a message sent by several large investors that they wanted Mr Agius’s successor to be an outsider who could draw a line under the last few weeks – the £290 million Libor manipulation settlement with regulators, the forced exit of chairman, chief executive and chief operating officer, and the underlying degeneration of relations with the British authorities. Whatever Sir Michael’s merits, Barclays investors are right to want a fresh start.
What should they turn their attention to next? Important as pay protests and boardroom change are, there is a more fundamental campaign they should be waging – to force banks to face up to the new order of things imposed by a weaker economic outlook and a tougher regulatory landscape. The truth is most of the world’s banks are too big and should be broken up. Prompted by the Barclays debacle, a fresh debate has sprung up in political circles and among some bank analysts over the merit of going further than the UK-US axis of Vickers and Volcker and forcibly splitting up universal banks. The danger and potential expense posed by an investment bank to a retail bank are just too great, the reformers argue.
The latest contribution to the argument comes from analysts at German private bank Berenberg, who make the case for a total split of activities and a forcible return of investment banking to partnership status, echoing a point made in this column last week. It suggests a neat way to explicitly align the conflict between banker pay and regulators’ demands for higher capital: keep deferred pay in a pot available as contingent capital for the period of deferral – "capital adequacy buffer securities”.
But the real focus of the Berenberg argument is essentially that the world should return to the old order of things in the US, when the now-repealed Glass-Steagall Act forcibly kept retail and investment banking apart.
A regulated split is not the panacea that some would think. Making investment banks stand on their own two feet might feel righteous but it ignores the real issue – badly run banks will fail whatever their line of business. And, like it or not, governments will ultimately be on the hook to bail out big badly run banks, even if their obligation to draft "living wills” makes wind-ups more manageable.
There is, all the same, a powerful argument for breaking up universal banks – not through legal intervention but through shareholder power. As the Berenberg note argues, owning shares in an investment bank today, particularly one that is part of a universal bank group, is unappealing. "We do not believe that the current investment banking model is compatible with equity ownership due to the behaviours and incentive structure embedded in the industry,” it concludes.
But the break-up logic doesn’t only apply to banks that bridge retail and investment banking. One look at the valuations attached to banks around the world sends some clear messages. Predictably, investors like emerging market operators, assigning them share prices well in excess of the book value per share of their balance sheets. Yet across much of the western world, particularly in Europe where markets are spooked by the eurozone crisis, valuations are running at half of book value or less. The signal sent by the rare exceptions – such as thriving lender US Bancorp – is clear: simple and narrowly focused is the order of the day.
And this is precisely what bank investors should be agitating for now. At Barclays, investors should push for an open-minded chairman and CEO to be appointed who will take a fresh look at the merits of the group persisting with a bulge-bracket investment banking strategy alongside its high-street operations.
Similarly, with existing management at other underperforming banks, investors should be campaigning, too. Any group that could be deemed "too big to manage” is a potential break-up candidate.
Italy’s UniCredit may be a test case. The bank recently found itself with private equity and hedge fund Pamplona – backed by Russian billionaire Mikhail Fridman’s Alfa Group – as a 5 per cent shareholder. Pamplona has not disclosed its investment strategy, but some believe a break-up would be logical. If that is UniCredit’s fate, bank investors elsewhere would do well to watch the developing blueprint.
Patrick Jenkins is the Financial Times’ Banking Editor. Copyright The Financial Times Limited 2012.
