REUTERS/Ralph Orlowski
Writing in The Financial Times on Wednesday, John Reed, former chairman and CEO of Citigroup, argues that the world's big banks will never return to their precrisis glory days of enjoying the biggest influence and the biggest profits.
In 1999, Congress repealed the Glass-Steagall Act, which had barred commercial banks (think precrisis Bank of America) from also being involved in things like trading and investment banking (think precrisis Merrill Lynch).
After Glass-Steagall was repealed, Reed writes, banking enjoyed a period in which the idea that a "universal bank" in which customers and investors could have all of their financial needs met reigned supreme. These banks had the most people, the most capital, the most reach, and the most profits.
But in the wake of the crisis, the world's biggest banks have come under scrutiny and, particularly in Europe, begun undertaking a series of restructurings and downsizings.
So to Reed, it's clear this "universal" model did not and will not work. For one thing, Reed think it's clear that bigger banks will not create more cost-efficient services for customers and investors.
But more important, the combination of traditional and investment banks has led to culture clashes that may have created fatally flawed institutions.
Reed writes:
As is now clear, traditional banking attracts one kind of talent, which is entirely different from the kinds drawn towards investment banking and trading. Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organisations tend to organise and focus on products rather than customers. This creates fundamental differences in values.
And so in short, Reed doesn't think this will ever work.
Meanwhile, the US investment bank turned big bank Morgan Stanley announced plans on Thursday to make a more serious push into retail banking.
Goldman Sachs, traditionally an investment bank, took a similar step toward expanding into consumer lending in August when it agreed to buy GE Capital Bank's online deposit business.