Euromoney will never forget dinner with a hugely influential bank regulator and a group of leading investment bankers that took place a couple of years ago.
While the bankers lined up to complain about how regulation had combined with tough markets to make it almost impossible to generate a return on equity higher than their cost of capital, the regulator leant back in his chair, before delivering a withering riposte: "It might just be that this crisis finally makes proper businessmen out of all you."
Bank chiefs are now prepared to admit that, in the rising pre-crisis markets, they (or in most cases, their predecessors, given the turnover at the top of the industry) failed miserably to follow good business practices.
"None of us were managed as an enterprise," says one investment bank head. "With cheap funding and infinite leverage, we were basically all managed on gap analysis. We were all just filling in the reds."
That meant all big banks were effectively trying to follow the same business model – to be all things to all people everywhere. And just about any banker you speak to today will tell you that such a model was inherently flawed.
The discussion now turns to how banks can leverage their inherent strengths, rather than their balance sheets.
A look at the winners of our biggest awards for excellence this year gives a good idea of how this should be done.
Take our bank of the year, Wells Fargo. Its strengths are in retail and commercial banking in the US, where it does 97% of its business. The model works – it makes almost as much money as JPMorgan, with a balance sheet the size of Lloyds Bank in the UK. Wells Fargo’s CEO John Stumpf says he is "all-in America". Don’t expect him to announce plans for transformational expansion overseas any time soon.
For all its supposed Machiavellian tendencies Goldman Sachs, our investment bank of the year, has a rather simple business model – to employ the smartest people, to make themselves the adviser of choice to clients, and to make as much money for the firm as possible.
It is also a very well run business, something some competitors often conveniently forget. One bank chief who spent time earlier in his career at Goldman recalls: "I learnt more about how to run a business while I was there than I did about banking." Its chief executive, Lloyd Blankfein, ruefully recalls previous management’s forays into retail. Don’t anticipate that happening again, for all the talk that Goldman’s monoline business model is unsustainable in the new environment.
Finding the right model for your own bank is the most important task for any chief executive today. Some have taken bold decisions – look at Sergio Ermotti’s focus on wealth management and Switzerland at UBS, or James Gorman’s rebalancing of Morgan Stanley through its US wealth and brokerage businesses.
But the truth is, the herd mentality still prevails. In investment banking, banks are being forced to exit or reduce business lines which require them to hold high levels or capital. But this is being driven by regulation, rather than a thorough appraisal of each bank’s capabilities.
The flipside is that many banks are all looking to boost those businesses that are capital-lite – transaction banking and wealth management are two which crop up regularly in discussions.
Meanwhile typical returns on equities remain, in most cases, steadfastly below the 10% cost of capital that is typical for the industry today.
It could yet be some time before the banking industry can trumpet the business credentials that the regulator wanted to see.