There is a good vignette of the current state of affairs in global banking published in this weekend's FT Lex. Entitled Wall Street Notice: Bern notice, it gives a great recap of the changes taking place in global banking and says "... the regulatory and market response since 2008 deserves to recognition for corralling Wall Street".
It posits that the failure of financial institutions was in part due to risky business models built on by risky capital structures. It then reminds us short term funding has been corralled, Basel III has introduced higher capital structures with the largest SIFIs subject to even further capital surcharges. Banks have reduced structured products (read subprime CDOs), prop trading and cut down on aggressive home and corporate loans. It points out that 10% ROE, once a paltry return, is now a best case outcome for many banks. Oh how the world has changed... in some ways. I agree with these words, but am reminded some banks are even much larger, financial market liquidity is way down as inventories have been cut, resulting in sharper price reaction and difficulty in getting out of bond positions. Lastly, there is still many unanswered questions about how this new banking model will work, one day in the future, without the benefit of near zero interest rates, QE, and ECB inspired funding structures. When economic picks up at some point, how will it all get funded and what is the role of market based finance in all this?
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