[59th] Global Crisis Changes Financial Landscape
By Yoon Ja-young
Every turmoil in world history has survivors and casualties ― the global financial crisis caused by the fall of Lehman Brothers last year was no exception.
Among the major global banks ― Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Sterns ― JP Morgan and Goldman Sachs successfully survived, rising to the top.
They have already repaid the government loans they received under the troubled asset relief program in June after successfully passing a stress test. JP Morgan recorded $3.6 billion in profits in the third quarter, around five times more than a year ago, and Goldman Sachs, $3.2 billion, which is more than three times the amount from a year ago.
Citigroup, the symbol of the U.S. banking industry, meanwhile, turned quasi state-owned, with U.S. taxpayers owning one third of the stakes after a government bailout. It marked $8 billion credit losses in the third quarter, and things are expected to be tough for the falling empire in the coming years as the U.S. consumer finance market will remain sluggish amid a terrible job market.
Meanwhile, some banks capitalized on Citigroup's woes and successfully increased their share of the pie in the global market.
Standard Chartered, HSBC and Credit Suisse are some of the few international banks that have remained strong during the financial crisis.
Here are some of the lessons learned from winners.
Lesson 1: Risk management
The high-risk, high-return U.S. investment bank model showed weaknesses. Survivors say that risk management was the key to overcoming difficulties. While it didn't seem to pay off in ordinary times, it does in times of trouble.
Standard Chartered, for example, was hardly affected by the sub-prime crisis. The bank stresses that risk management has remained at the core of its business.
``At Standard Chartered we have stuck to our strategy of focusing on Asia, Africa and the Middle East, markets we know well, doing business with customers with whom we have long-standing relationships, selling products we understand fully,'' said Peter Sands, CEO of Standard Chartered.
``We also focus on the basics of banking. That is, strong risk management, controlling costs, maintaining a strong balance sheet and high levels of liquidity across all our markets. That has enabled us to take market share from competitors by supporting our customers throughout the crisis and deepen relationships in a way that others have been unable to match.''
Lesson 2: Back to Basics
Experts say that the global financial market is likely to result in focusing more on the traditional banking model. HSBC calls it ``back to the basics in banking.''
HSBC didn't need any government help in any of the 86 countries where it operates. The bank says the key was ``understanding and sticking to the basics of banking.''
Its chairman said during an interview with a British media organization that from the moment the Hong Kong and Shanghai Banking Corporation was founded in 1865, it knew it would be bigger than Hong Kong. Since it never had a bank as its last resort, it had to be careful. It always had to have an asset/deposit ratio of less than 100 percent.
Currently, HSBC as a group has an asset/deposit ratio of 79 percent, which means it lends only 79 percent of the deposits it takes. Twenty-one percent of the money doesn't bring any returns for them. It is a very conservative way of management.
HSBC does not pay the best rates since it wants to minimize risk. However, it aimed to be one of the most solid banks in the world. The efforts have paid off. It was named Global Bank of the Year in this year's Euromoney Awards.
Lesson 3: Stick to Foresight
The survivors had the foresight to prepare themselves for the crisis. Credit Suisse, for example, was the leader in commercial mortgage-backed securitization, leverage finances and principal investments, in which investment banks were making the biggest profit. As the market turned weak in 2007, however, these sectors were exposed to the biggest risks.
Credit Suisse sensed the worsening signs of the market, and started discussing the subprime problem from 2006. In the first quarter of 2007, the market situation made the management feel uneasy. Hence, it slashed its position related to the subprime mortgage market, and started considering ways of hedging.
When Credit Suisse announced its second quarter 2007 performance and showed concern over the subprime market, it had already taken measures to refurbish its strategic position. The decision resulted in a notable performance in the first quarter of 2009. When the market collapsed after the fall of Lehman Brothers on Sept. 15, 2008, Credit Suisse stood on much firmer ground than its competitors.
In its second quarter performance, it reaped $1.5 billion in net income, up 29 percent from a year ago, and its capital ratio stood at 15.5 percent as of June 2009, maintaining notable financial health among global banks. Credit Suisse ranked number two worldwide in terms of cash equities for the first quarter of 2009.
Lesson 4: Regulation Is Necessary
The preference for high-risk, high-return coupled with the U.S. government's deregulation brought about the global crisis.
Korea Institute of Finance senior research fellow Kim Dong-hwan said the de facto scrapping of the Glass-Steagal Act was the main reason for the global crisis.
``The Act, introduced in 1933, separated commercial banks from investment banks. Traditionally, commercial banks were conservatively managed, while investment banks worked in an aggressive way, under their own responsibility,'' Kim explained.
After the neo-liberalism move in the 1980s represented by Thatcher and Reagan, commercial banks increasingly became more aggressive like investment banks. Kim added that the large U.S. banks transformed into holding companies, which holds both commercial bank and investment banks, and de facto nullifying the Glass Steagal Act.
``Investment banks were originally engaged in initial public offerings (IPO), but the bout of M&As after the collapse of the IT bubble in the early 2000s made them jump into the sector for fees and focus on derivative products,'' he said.
He said the demolishing of walls in the financial industry and infinite competition formed the bubble, which later collapsed.
``The true sale principle was broken by the launch of derivatives like credit default swaps. The U.S. regulator, which should have regulated such a move, went toward deregulation. It triggered the collapse of Lehman Brothers,'' Kim said, adding that the survivors were those who were conservative.
``The surviving investment banks quickly transformed into holding companies, which are subject to stricter regulation. The strict regulation helped them survive.''