UBS, which is among the banks most battered by the credit crunch, said today that it would separate its flailing investment bank from its lucrative business of managing money for rich people, and, adding in its asset management arm, now exist as three autonomous divisions. Writing down more than $42 billion in assets over the course of a year and watching $16 billion in client money get yanked in a single quarter are the sorts of things that make you go back and rethink your business model.
In UBS’s case that rethink has led to the conclusion that the concept of universal banking—having retail banking, investment banking, wealth management, mortgage lending, and fund management all under one roof—is not such a good idea. “Our review has clearly revealed the weaknesses associated with the integrated ‘one firm’ business model,” UBS chairman Peter Kurer said. Deal Journal, over at WSJ.com, argues that UBS isn’t the best test of whether universal banking works; the firm, they write, never fully integrated its divisions. What is happening there says more about its management than its model.
But that doesn’t change the fact that the tide seems to be shifting on how big and integrated we want our banks to be. On the surface, it seems like diversification should steady financial institutions in times of tumult, but now, increasingly, it seems that what it actually does is add complexity and confound risk management to the point of some very bad things happening. Not to mention, some would say, stifle profits. For more than a year, critics of Citigroup have pushed for that company to break itself up in order to unlock shareholder value. In the past few weeks, banks like HSBC, Barclays and Societe Generale have felt the need to very loudly defend their own universal-bank models.
Where to look for insight?
In homage to Justin, I am going to suggest the Netherlands. There is a graduate student at the London School of Economics named Chris Colvin who seems to be building quite a base of knowledge about the Dutch financial crisis of the 1920s. One of his papers is a matched pair comparison of two similarly sized banks, the Amsterdamsche Bank, which escaped the crisis relatively unscathed, and the Rotterdamsche Bankvereeniging (RBV), which needed a bail out from the Dutch central bank. Guess which was more universal? Yep, you got it, the embattled RBV.
Colvin chronicles the play-by-play. If you’re into Dutch economic history, it’s fascinating, and pretty interesting even if you’re not, considering the parallelism to today. At one point Colvin writes: “Despite the bank’s internal worries, the publication of the RBV’s 1923 annual report to shareholders published in May 1924 reads on the whole upbeat, blaming the bank’s ‘minor problems’ on the economic cycle.” You can read the whole paper by going to Colvin’s web page and scrolling down to the second-to-last “work in progress.”
Or, you can just read the punchline here:
The working hypothesis is that the RBV’s universal scope was the cause of her difficulties. The alternative hypothesis is that the bank’s problems were due to general bad management. The section settles for a middle ground: the bank’s crisis was caused by general bad management that can be primarily attributed to her universal structure.
That’s useful to know. Perhaps we can learn a little something from that history. But then Colvin, an intellectually honest academic in the making, writes:
Of course, there are many theoretical problems in generalising from a case study. It is therefore perhaps prudent to restrict these findings to the Dutch case, i.e. the RBV’s universal structure caused her financial instability.
Still, a cool anecdote.
Barbara!