International Finance Needs to be Restructured and Retrained


The global financial markets are in a state of “bad volatility” — characterized by elevated levels of fear, rather than vigorous trading in interest rates and foreign exchange. Two things are needed; a complete bank restructuring, and intensified corporate executive training programs on the many new banking regulations. International organizations are increasing their, albeit non-binding, banking regulation efforts by publishing a myriad of restructuring and conduct regulation guidelines. An example of this is the European Securities and Markets Authority (ESMA), an independent institution that attempts to “safeguard” the European Union’s financial system, which is publishing a series of banking restructuring policies that are receiving increasingly more attention from banks and financial institutions alike. The effort to try and limit the size of banks comes at a time when lukewarm consumer demand and a continued zero rate environment are intensifying pressure for banks to cut costs. Therefore, while banking supervision attempts are steadily increasing, what we see also is a semi-voluntary return to simpler capital standards by banks themselves who are cutting their size.

First, what is needed is complete banking overhaul – from pursuing asset sales, cutting costs, to reducing the size of bank balance sheets. We have already seen this materialize; large banks are not getting larger – instead they are shrinking their capital. The U.S.’s three biggest banks have reported year-on-year falls in core quarterly revenues. Goldman Sachs’ third-quarter earnings came to $2.90 per share on revenues of $6.9 billion — the lowest quarterly haul since 2013. Their net income is now $1.33 billion, down 38 per cent from 2014. On the other side of the Atlantic, large U.K. banks are introducing new requirements to separate their retail banks from investment-banking activities by 2019, in an effort to ensure depositors and small businesses aren’t put at risk if a lender’s investment banking operations fail. Do those words sound familiar? The Glass-
Steagall that was enacted in the U.S. with the 1933 Bank Act, and abolished in 1999 by President Clinton had long separated investment from commercial banking and prevented large banks from becoming too large. The systemic nature of finance was mitigated by preventing investment banks to use cheap capital – deposits – which lowered the size of their risky bets. While in the U.S the debate about reinforcing an act similar to Glass-Steagall has been remotely active in recent years and especially relevant during the democratic debate, the UK is already making serious bids towards enacting such a law. While the new UK act by the Bank of England is not immediately enforcing a separation of commercial and investment banking, it is limiting such efforts by for example implementing bank’s retail operations to pay market rates for services provided by other parts of the bank.

Much of this change needs to come from within financial institutions, rather than solely as a top down approach, but many banks – especially small to medium sized ones – do not have the knowledge or human capital to do so. All, but especially these smaller financial institutions need to make increasing efforts to establish ad hoc executive and leadership training to comply to a myriad of international standards and guidelines. International organizations have been busy publishing report after report calling for increased banking standards. ESMA, for example, is currently revising its original Markets in Financial Instruments Directive (MiFID) of 2007, and by January 2017 it will be known as MiFID II. This Directive is a comprehensive piece of legislation and, depending on business model, could affect a wide range of a firm’s functions – from client services to IT and HR systems. Under these guidelines, financial institutions are encouraged to provide regular mandatory training to staff on the general characteristics of the industry, including potential risks of the products offered, and global macroeconomic forecasting and risk-aversion. In this notion, financial institutions should make an extensive effort to participate in training programs organized by credible establishments to remain competent and knowledgeable about the myriad of rules and guidelines. An institution that has tenure in the financial training niche is the Global Training and Continuing Development Department of the Institute of International Finance, based in Washington, D.C. but with offices across the globe, provides executive training programs on a variety of facets within the financial world, and has had an increasing list of members participating in their sessions.

A combination of a banking overhaul fueled by international organizations and a systemic re-organization from within banks will lead to a successful restoration of the health and competence of financial markets all over the world. A return to a Glass-Steagall like world would limit the size of banking institutions, which would lead to reducing the risk of the extremely volatile financial markets. Without serious consideration of risks involved, we will soon see history repeating itself with another systemic financial crisis, and we definitely don’t want the consequences this time to be a tragedy.