6 ms·

The Never-Ending Story: Europe’s Banks Face a Frightening Future

63 points by T-A 11y ago

sandworm101 11y ago
>> While American banks appear to have turned the corner since that gut-churning autumn nearly eight years ago, European institutions are girding yet again for another round of restructuring. The world should not work for the banks. The fact that American banks are now bigger than ever before is not a good thing. We need more banks, more competition in the marketplace. For that to happen the big banks have to first shrink and/or be manually broken apart. Europe's banks may not be happy, but Europeans should be. They are doing what American and the UK want but have so far failed to accomplish. >> there’s once again a flight to simplicity. That’s what regulators are demanding. And that’s what legions of customers are expecting as startups deliver financial services at the tap of an app. I wouldn't go that far. The answer to the too-big banks isn't necessarily a new paradigm. A larger number of smaller and more traditional banks offering very traditional services is also an answer. I'm not sure I want any of my banking to ever be "at the tap of an app". I don't take money so casually. Online yes, app tapping no.
- omegaworks 11y ago
  Exactly. I wonder how much of this transformation can be emulated in the states; how much people in Congress are paying attention to what's happening across the pond. >> That month, Deutsche agreed to pay $2.5 billion in penalties to U.S. and U.K. authorities for its role in the Libor rate rigging. (No current or former member of the bank’s management board was implicated.) It's very hard for me to feel bad for these people.
  - kasey_junk 11y ago
    Just for added context citi & jp Morgan paid over 2 billion in penalties as well.
  - Eudyptula_minor 11y ago
    Something tells me American Congress is not paying attention THAT much.... XD
  - tomp 11y ago
    >> (No current or former member of the bank’s management board was implicated.) > It's very hard for me to feel bad for these people. Why would anyone feel bad for them? They got what they wanted (bonuses), and didn't face any negative consequences (jail).
- lmm 11y ago
  The core business of a bank is taking a global view on risk. The very idea of maturity transformation (at the heart of what a bank does) relies fundamentally on being big enough that the laws of large numbers come into play. If we're saying we don't want big banks then we're saying we don't want banks. Maybe you want that - maybe mortgages should be sold directly to investors on the same maturity terms - but it would be a radical change to the way finance works for everyone.
  - orbifold 11y ago
    Ideally banks should be done away with as soon as possible, that is for certain. Private institutions that control part of the the money supply in exchange for taking on the risk of evaluating and assessing worthy recipients of credit is something that made sense before there was a supercomputer in everyones pocket. There are now already better alternatives. Replacing banks should be just one example of recovering centralised power for the people by means of technology.
    - ApplaudPumice 11y ago
      I'm not good with economics, do you have any link which explains alternative models sans banks?
      - smaddox 11y ago
        The only role banks fulfill that couldn't easily be replaced by a digital currency is financing speculative investments by providing loans. Unfortunately loans also expand the money supply (and contract the money supply upon repayment/default), resulting in a positive feedback on investment, which can induce instability (i.e. the business cycle). It would be much better to decouple the money supply from investment. The money supply could be controlled either by a trusted agent (e.g. central bank), or possibly by a built-in stabilization algorithm (an interesting avenue for research), while investment could by financed privately. This would be the best of both worlds.
  - ZenoArrow 11y ago
- rayiner 11y ago
  Do we need more competition in banks? We have way more viable banks than say viable mobile operating system makers, or viable desktop operating system makers, or viable search engines, etc. Do those markets lack adequate competition?
  - ZenoArrow 11y ago
    > "Do those markets lack adequate competition?" Yes, they certainly do. All of the markets you listed could do with stronger competition. As for banks, I also think they could do with stronger competition. We should never have any company which is 'too big to fail'.
    - rayiner 11y ago
      What makes you think competitive markets keep entities from becoming "too big to fail?" There are enormous economies of scale in nearly any business. There is a reason there are just a handful of companies left capable of gabbing their own chips. Same with say Amazon and Wal-Mart. The market equilibrium in any moderately capital-intensive industry favors just a handful of huge competitors.
      - ZenoArrow 11y ago
        > "The market equilibrium in any moderately capital-intensive industry favors just a handful of huge competitors." That's why it's necessary to occasionally clip their wings. Even if capitalism left unchecked results in large concentration of power, the role that government plays in regulating these markets is to enable (or at least, should be 'to enable') new competitors to emerge that can compete with established players, in order to maintain healthy levels of competition.
- ZenoArrow 11y ago
  > "I'm not sure I want any of my banking to ever be "at the tap of an app". I don't take money so casually. Online yes, app tapping no." I'm not sure why convenience takes away the seriousness of what a bank does. It's just a place to store money and invest in the economy, what does it matter how you access the information about your account? For example, what's the issue with a bank like Mondo? https://getmondo.co.uk https://getmondo.co.uk
cm2187 11y ago
Big banks have horribly dated systems and are bureaucratic to the extreme, but I doubt peer to peer lending will make more than a small dent in the consumer lending market. For a simple reason: banks can lend that much money that cheaply only thanks to a large, cheap and stable source of funding: bank deposits. And there are two types of deposits: current account and savings account. Current accounts come with the capacity to make payments, and for that you need to be a bank. So the only way the p2p lenders will access this source of funding is by becoming big bureaucratic and highly regulated banks themselves. Then you have savings account. It sounds like an investment but it's not. It's really a risk free, lazy investment. If the bank makes a loss on its loans, it is not passed on to the depositors. Even if the bank goes bust, and unless you have a very large deposit, your deposit is insured by the State. People who keep money on savings accounts aren't the type who are looking for risk and high returns. P2p relies on investors actively investing in these vehicles. I don't see how this will be nowhere as large as the deposit base in a country. On the wholesale funding market, things are different. Investors are active investors and it is much easier to shortcircuit banks and lend to corporations directly. Initially the banks were arranging the transaction, but I expect the investors to increasingly cut the middle man. And all these articles miss what makes the biggest barrier to entry to the banking market: regulations. A bank would typically employ dozens of people just to read and follow all the regulations that apply to them. Regulations kill their profitability (they have to operate with 3 times the capital base they had in 2007), but also shields them from competition.
- trgn 11y ago
  I think the whole point of a savings account is that it's not an investment. Thankfully. Banks don't use deposits when lending out money. They create the loan amount out of thin air. There are regulations as to how much they can do that relative to their assets. Thankfully.
  - cm2187 11y ago
    No they do lend the proceeds of the deposits. What the economists mean by "creating money" is that people treat deposits as cash, and therefore have the feeling they have cash when they have a positive balance on their bank account, where in reality all they have is an IOY from a bank. But their cash is not in the bank anymore.
legulere 11y ago
> Startups are reinventing the business of retail banking. Sorry but this is complete bullshit. Both cooperative banks and public savings banks are both bigger in retail than the private banks. Then you still have some special banks like the federal KfW that offers cheap loans for things the government wants to promote. The whole article actually only concentrates on the private banks and ignores the existence of public and cooperative banks that had significantly less problems in the crisis. https://en.wikipedia.org/wiki/Banking_in_Germany#Market_overview https://en.wikipedia.org/wiki/Banking_in_Germany#Market_over...
guard-of-terra 11y ago
"But Christensen says no large organization in any industry has ever been successful in building disruptive technology on its own" Counter example: an iPhone. There are a lot of examples like this.
randomgyatwork 11y ago
I want to read this article but the colours and white text on black background is too painful. Does anyone know how to read this in normal colours?
pjg 11y ago
This article has a strong sideline of Banks fear of fintech startups eating their lunch and goes on to cite 2 specific examples of large banks doing things the disruptive way: Chase disbursing loans thru ondeck.com and Deutsche Bank sending its COO to built a totally Digital "startup bank". In reality the culture hasn't changed at all - both in my personal experience as well as others I've talked to. Dealing with mid-level Bank managers is till pretty much a "closed club" game. The attitude seems to be (1) either you get to Series A/B before we talk to you - at which time its too late because the business model for a fintech startup is defined early on -well before Series A or (2) Sorry we just don't deal with startups (and cite some regulatory "grey area" as an excuse). Unless the culture changes down to mid-level ranks Banks will loose big time

63 points by T-A 11y ago

>> While American banks appear to have turned the corner since that gut-churning autumn nearly eight years ago, European institutions are girding yet again for another round of restructuring. The world should not work for the banks. The fact that American banks are now bigger than ever before is not a good thing. We need more banks, more competition in the marketplace. For that to happen the big banks have to first shrink and/or be manually broken apart. Europe's banks may not be happy, but Europeans should be. They are doing what American and the UK want but have so far failed to accomplish. >> there’s once again a flight to simplicity. That’s what regulators are demanding. And that’s what legions of customers are expecting as startups deliver financial services at the tap of an app. I wouldn't go that far. The answer to the too-big banks isn't necessarily a new paradigm. A larger number of smaller and more traditional banks offering very traditional services is also an answer. I'm not sure I want any of my banking to ever be "at the tap of an app". I don't take money so casually. Online yes, app tapping no.

omegaworks 11y ago
Exactly. I wonder how much of this transformation can be emulated in the states; how much people in Congress are paying attention to what's happening across the pond. >> That month, Deutsche agreed to pay $2.5 billion in penalties to U.S. and U.K. authorities for its role in the Libor rate rigging. (No current or former member of the bank’s management board was implicated.) It's very hard for me to feel bad for these people.
- kasey_junk 11y ago
  Just for added context citi & jp Morgan paid over 2 billion in penalties as well.
- Eudyptula_minor 11y ago
  Something tells me American Congress is not paying attention THAT much.... XD
- tomp 11y ago
  >> (No current or former member of the bank’s management board was implicated.) > It's very hard for me to feel bad for these people. Why would anyone feel bad for them? They got what they wanted (bonuses), and didn't face any negative consequences (jail).
lmm 11y ago
The core business of a bank is taking a global view on risk. The very idea of maturity transformation (at the heart of what a bank does) relies fundamentally on being big enough that the laws of large numbers come into play. If we're saying we don't want big banks then we're saying we don't want banks. Maybe you want that - maybe mortgages should be sold directly to investors on the same maturity terms - but it would be a radical change to the way finance works for everyone.
- orbifold 11y ago
  Ideally banks should be done away with as soon as possible, that is for certain. Private institutions that control part of the the money supply in exchange for taking on the risk of evaluating and assessing worthy recipients of credit is something that made sense before there was a supercomputer in everyones pocket. There are now already better alternatives. Replacing banks should be just one example of recovering centralised power for the people by means of technology.
  - ApplaudPumice 11y ago
    I'm not good with economics, do you have any link which explains alternative models sans banks?
    - smaddox 11y ago
      The only role banks fulfill that couldn't easily be replaced by a digital currency is financing speculative investments by providing loans. Unfortunately loans also expand the money supply (and contract the money supply upon repayment/default), resulting in a positive feedback on investment, which can induce instability (i.e. the business cycle). It would be much better to decouple the money supply from investment. The money supply could be controlled either by a trusted agent (e.g. central bank), or possibly by a built-in stabilization algorithm (an interesting avenue for research), while investment could by financed privately. This would be the best of both worlds.
- ZenoArrow 11y ago
rayiner 11y ago
Do we need more competition in banks? We have way more viable banks than say viable mobile operating system makers, or viable desktop operating system makers, or viable search engines, etc. Do those markets lack adequate competition?
- ZenoArrow 11y ago
  > "Do those markets lack adequate competition?" Yes, they certainly do. All of the markets you listed could do with stronger competition. As for banks, I also think they could do with stronger competition. We should never have any company which is 'too big to fail'.
  - rayiner 11y ago
    What makes you think competitive markets keep entities from becoming "too big to fail?" There are enormous economies of scale in nearly any business. There is a reason there are just a handful of companies left capable of gabbing their own chips. Same with say Amazon and Wal-Mart. The market equilibrium in any moderately capital-intensive industry favors just a handful of huge competitors.
    - ZenoArrow 11y ago
      > "The market equilibrium in any moderately capital-intensive industry favors just a handful of huge competitors." That's why it's necessary to occasionally clip their wings. Even if capitalism left unchecked results in large concentration of power, the role that government plays in regulating these markets is to enable (or at least, should be 'to enable') new competitors to emerge that can compete with established players, in order to maintain healthy levels of competition.
ZenoArrow 11y ago
> "I'm not sure I want any of my banking to ever be "at the tap of an app". I don't take money so casually. Online yes, app tapping no." I'm not sure why convenience takes away the seriousness of what a bank does. It's just a place to store money and invest in the economy, what does it matter how you access the information about your account? For example, what's the issue with a bank like Mondo? https://getmondo.co.uk https://getmondo.co.uk

cm2187 11y ago

Big banks have horribly dated systems and are bureaucratic to the extreme, but I doubt peer to peer lending will make more than a small dent in the consumer lending market. For a simple reason: banks can lend that much money that cheaply only thanks to a large, cheap and stable source of funding: bank deposits. And there are two types of deposits: current account and savings account. Current accounts come with the capacity to make payments, and for that you need to be a bank. So the only way the p2p lenders will access this source of funding is by becoming big bureaucratic and highly regulated banks themselves. Then you have savings account. It sounds like an investment but it's not. It's really a risk free, lazy investment. If the bank makes a loss on its loans, it is not passed on to the depositors. Even if the bank goes bust, and unless you have a very large deposit, your deposit is insured by the State. People who keep money on savings accounts aren't the type who are looking for risk and high returns. P2p relies on investors actively investing in these vehicles. I don't see how this will be nowhere as large as the deposit base in a country. On the wholesale funding market, things are different. Investors are active investors and it is much easier to shortcircuit banks and lend to corporations directly. Initially the banks were arranging the transaction, but I expect the investors to increasingly cut the middle man. And all these articles miss what makes the biggest barrier to entry to the banking market: regulations. A bank would typically employ dozens of people just to read and follow all the regulations that apply to them. Regulations kill their profitability (they have to operate with 3 times the capital base they had in 2007), but also shields them from competition.

trgn 11y ago
I think the whole point of a savings account is that it's not an investment. Thankfully. Banks don't use deposits when lending out money. They create the loan amount out of thin air. There are regulations as to how much they can do that relative to their assets. Thankfully.
- cm2187 11y ago
  No they do lend the proceeds of the deposits. What the economists mean by "creating money" is that people treat deposits as cash, and therefore have the feeling they have cash when they have a positive balance on their bank account, where in reality all they have is an IOY from a bank. But their cash is not in the bank anymore.

legulere 11y ago

> Startups are reinventing the business of retail banking. Sorry but this is complete bullshit. Both cooperative banks and public savings banks are both bigger in retail than the private banks. Then you still have some special banks like the federal KfW that offers cheap loans for things the government wants to promote. The whole article actually only concentrates on the private banks and ignores the existence of public and cooperative banks that had significantly less problems in the crisis. https://en.wikipedia.org/wiki/Banking_in_Germany#Market_overview https://en.wikipedia.org/wiki/Banking_in_Germany#Market_over...

guard-of-terra 11y ago

"But Christensen says no large organization in any industry has ever been successful in building disruptive technology on its own" Counter example: an iPhone. There are a lot of examples like this.

randomgyatwork 11y ago

I want to read this article but the colours and white text on black background is too painful. Does anyone know how to read this in normal colours?

pjg 11y ago

This article has a strong sideline of Banks fear of fintech startups eating their lunch and goes on to cite 2 specific examples of large banks doing things the disruptive way: Chase disbursing loans thru ondeck.com and Deutsche Bank sending its COO to built a totally Digital "startup bank". In reality the culture hasn't changed at all - both in my personal experience as well as others I've talked to. Dealing with mid-level Bank managers is till pretty much a "closed club" game. The attitude seems to be (1) either you get to Series A/B before we talk to you - at which time its too late because the business model for a fintech startup is defined early on -well before Series A or (2) Sorry we just don't deal with startups (and cite some regulatory "grey area" as an excuse). Unless the culture changes down to mid-level ranks Banks will loose big time