With HSBC's announcement that it will lay off 25,000 workers, sell its Brazilian and Turkish businesses, and separate its retail operations from its investment banking in the United Kingdom, you could be forgiven for thinking that the financial sector is in some kind of trouble again, or that regulators have forced the industry to cede some of its stake in the global economy. You'd be wrong.
At least in this country, finance is back and feeling better than ever, as Neil Irwin wrote in the New York Times last month:
Seven years after a crisis that shook Wall Street to its core, the financial sector’s economic imprint has largely recovered. The number of people working in the securities business nationally has returned to 2007 levels, as has the gap between the compensation of Wall Street workers and that of everyone else. The financial sector as a whole is reporting profits that are as large a share of the overall economy as in the early 2000s and more than double their average level over the 70 years ended in 1999.
National and investment banks, though, are the ones that have enjoyed this success, not the behemoth international firms such as HSBC that have simply proven too cumbersome to manage, the Economist explained earlier this year. The costs of global scale outweigh the benefits, it turns out:
The panic about global banks reflects their weak recent results: in aggregate the five firms mentioned above reported a return on equity of just 6% last year...
There is a growing fear that the costs of global reach — in terms of regulation and complexity — exceed the potential benefits.
It all seemed far rosier 20 years ago. Back then banks saw that globalisation would lead to an explosion in trade and capital flows. A handful of firms sought to capture that growth. ...
These giant firms proved hard to manage. Their subsidiaries struggled to build common IT systems, let alone establish a common culture. Synergies have been elusive and global banks’ cost-to-income ratios, bloated by the costs of being in lots of countries, have rarely been better than those of local banks. As a result these firms have all too often been tempted to make a fast buck.
HSBC, apparently, has not been able to resist that temptation. In case you've forgotten, former Attorney General Eric Holder was explaining why the Justice Department hadn't prosecuted HSBC for its alleged involvement with Mexican drug cartels when he famously said that some banks have become "too big to jail."
If the decision not to prosecute HSBC resulted from its importance to the global financial financial system, that choice looks questionable in retrospect. Maybe a criminal investigation by Holder's staff and the possible loss of HSBC's license to bank in this country would have been the straw that broke the camel's back, or maybe not. It’s clear the firm has serious problems, apart from the actions of regulators here.
HSBC has run afoul of regulators around the world. "Explaining why the bank had failed to hit its previous return on equity target — set when Mr Gulliver took over in 2011 — the chief executive said the performance was undermined by $11.1bn of legal, regulatory and other charges, as well as rising compliance costs and higher capital requirements. HSBC has been hit by fines and compensation for a number of legal scrapes, including rigging foreign exchange markets, breaching US sanctions and money laundering rules, and mis-selling payment protection insurance in the UK." The Financial Times.
"'Cutting 25000 jobs is inevitable consequence of loss of our core business of money-laundering, tax avoidance and Libor manipulation' - HSBC" -- @davidschneider