Even before coronavirus, globalisation was on the decline. Both international trade in goods and services and capital flows have been falling for a decade. The virus is likely to accelerate this.
Looking back, then, on what might have been the golden age of globalisation, it is remarkable that one of the industries where borders still matter most is banking.
Its core product, capital, moves as electrons across a wire. The economies of scale are enormous, because modern banking requires huge technology investments. And big diverse global banks should also have a lower cost of capital than local competitors.
Yet despite gains from globalisation in the lead-up to the financial crisis, the overall international record of the industry is poor. Just last week came a reminder of the challenges of a global bank: Deutsche Bank agreeing to pay US regulators $125m to resolve allegations that it paid bribes to win clients in the Middle East and elsewhere.
The case was the latest in the long line of scandals for international banks, not just Deutsche — a bank known for chasing business that other banks found too risky. Among other notable missteps, Goldman Sachs had to pay $3.9bn to settle the 1MDB bribery scandal in Malaysia last year. JPMorgan has also had issues in Asia. In 2016, it agreed to pay $264m to settle a US probe into its practice of hiring well-connected Chinese “princelings” to win business.
All of these alleged cases involved gross failures of judgment. But they are just broader symptoms of global banking’s deeper problems.
The history of big European banks trying to enter the big, profitable US market, on the retail or investment banking side, is a tale of disappointment and retreat. Credit Suisse, Deutsche Bank and Barclays have all made big investments in the US in recent decades, and have mostly low league-table rankings to show for it. Spain’s BBVA is the latest European bank to abandon its retail operations in the US. HSBC may follow soon.
Heading in the opposite direction, from the US to the world, Citigroup is the telling example. It has bought and invested in big retail operations in both Mexico and across Asia. But the US group has never been able to demonstrate that having them as part of Citi contributes something to the larger enterprise. Citi’s returns and stock valuation stubbornly trail behind peers.
There are, of course, some successful global banking businesses, primarily those that serve specific purposes. Citi’s excellent treasury services franchise is an example, as are the global capital markets businesses of the big US universal banks. There are even a few examples of banks with successful full-service banking operations in particular markets, such as Santander’s operations in Latin America.
But the contrast with other more global industries, from software to cars, remains striking. Banking remains persistently local. Why? The first answer bankers give, and probably the most important one, is regulation. Governments like their banking industries to be thoroughly under local control. But this cannot be the whole story. So I would offer, somewhat speculatively, three other reasons.
First is that banks often expand internationally by acquisition. Management at headquarters often end up with a business they do not truly understand. HSBC’s misadventures after buying Bital in Mexico are a vivid example.
This is compounded by the second reason: the extreme cyclicality of the banking business. When the global economy catches a cold, banks get the flu. And when times are tough, banks tend to cut investment in their international subsidiaries. But, in banking, downturns are exactly when investment is effective. This destructive pattern of abandonment by headquarters has much to do with the failure of global investment banks in the US.
The final reason, I suspect, is that banking is fundamentally a business of judgment. It is about deciding which counterparties to lend to and trade with. There are always incentives for putting short-term gains ahead of the long-term health of the business. Far from headquarters, where a bank’s culture is built and maintained, bad judgment is less likely to be noticed and policed.
Banks will always look abroad for growth. But those that succeed will note the pitfalls and ask: how well do we really understand this new market? Will we keep investing in it during the tough times? And are we willing to send our very best and most trusted leaders there?
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