8/22/2019 Small US Banks in Big World?

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July 15, 2012

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Smal l U.S. Banks in a Big World?ByTonyFratto,(202)822-1205,tfratto@hamiltonps.com

Thefinancialneedsofindividualsandcompaniesaroundtheworldhavegrownexponentiallyinrecentdecadesexplosivegrowth,farexceedingtherateofglobaleconomicgrowth.Andwerenottalkingaboutderivativeproducts,butdebtandequityinstrumentsexpandingthroughouttheglobe.Notonlyisthisglobalmarketastonishinglylargetoday,itsonlygoingtogetmuchlargerincomingdecades.

AsweseeeconomicgrowthinlargeemergingmarketslikeChina,India,BrazilandNigeria,andhundredsofothersmallermarketsinadditiontocontinuedgrowthinlargedevelopedmarketsweregoingtocontinuetoseeaneedforfinancialintermediation.Asthevolumeoftradeexpandsacrosstheglobe,includingexportsbyU.S.firms,theneedforglobalbankingwillgrow.Itsabouttheonlysurethingasyoucanbetontoday.AquestionforpolicymakersisWhoisgoingtodoallthatbanking?Thesmallbankadvocatesotherwisesmartandwell-intentionedpeopleare

apparentlyunabletoconceptualizethesheermassiveneedsofglobalfinance,andinsteadimagineaworldwheresmall,localbankscandothiswork.Sojustatthetimewhenfinancialinstitutionswiththeglobalnetworksandscalearemostneeded,weseebreathlessnewcallstocapthesizeofbanksinparticular,U.S.banks.SimonJohnsonrecentlyarguedthatglobalbanksshouldsimplifyalongnationallines.DallasFederalReservePresident,RichardFisher,andformerKansasCityFedPresident(andcurrentFDICcommissioner),ThomasHoenig,eachcallforbreakingupbanks.Theresanalmostnostalgic,LakeWoebegonequalitytotheirpolicyguidance.Whatthesecallsignoreisthefactthattheseinstitutionsprovideservicesthatareinhighdemandaroundtheglobe,notjusttheU.S.Infact,itshardtoseehowtheglobaleconomycouldefficientlyfunctionabsentbig,globalbanks.FortheU.S,itwouldmeanforfeitingourabilitytocompeteinthisrapidlygrowingglobalmarket.

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Herearethefacts:Since1990,theglobalstockoffinancialassetshasgrownfourtimestherateoftheglobaleconomy.Innominalterms,thistranslatestoovera1000percentincrease.

Exhibit!1 !THE GLOBAL STOCK OF FINANCIAL ASSETS HAS GROWN 4

TIMES THE RATE OF GDP OVER THE PAST 20 YEARS!

Source: McKinsey Institute!

PercentofGD

P

220!200!180!160!140!120!100!80!60!40!20!0!

Nonsecuritized loans !outstanding!

Securitized loans !outstanding!

Nonfinancial corporate !bonds outstanding!

Financial institution !bonds outstanding!

Public debt securities !outstanding!

Stock Market !Capitalization!

2010!2005!2000!1995!1990!

Global Financial Stock as a Percent of Global GDP!

Thisdoesnotreflectthegrowthofcomplexderivativeproductsonlythevalueandvolumeofportfolioinvestments,privateandofficialcreditinstrumentsandnewcapitalmarketsinAsia,LatinAmericaandAfrica.Morebroadly,thedataunderscoreshoweconomicgrowthistrendingtowardsthedeepeningoffinancialmarketsthroughouttheglobe.Thedataalsohighlightthatthefinancialneedsoftheglobaleconomyhavecausedglobaleconomicactivitytobecomeincreasinglymoreinterconnected.Cross-borderflowsincludingforeigndirectinvestment,loans,equityanddebtpurchasesreached$10.7trillionannuallybeforethefinancialcrisis,upfromlessthan$1trillionin1990.Beyondinvestment,U.S.tradevolumehasincreasedroughlyfourtimesits1992level.Thislevelofeconomicactivityissupportedbya$10trilliontradefinancemarketandglobalforeignexchangeactivitythattops$4trilliondollarsaday,ofwhichover$800billioninvolvestheU.S.dollar.Thatismorethanaten-foldincreasesince1986.

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Exhibit!2 !

Dollars

($B)

700!600!500!400!300!200!

1990!0!

1995!1985! 2000! 2005! 2010!

100!

800!900!

DAILY US FOREIGN EXCHANGE TURNOVER HAS INCREASED

FROM $58 BILLION TO OVER $800 BILLION IN 25 YEARS!Daily U.S. Foreign Exchange Turnover!

Source: New York Feder al Reser ve!

Spot trades represent 55

percent of the total while

futures have risen from nearly

nothing in 1992 to over $100

billion a day in 2010.!

Thebottomlineisthatgrowingglobalfinancialopportunitiesmeanindividualsandcompaniesarelesstiedtotheirhomecountry.Assuch,globalbanksareessentialtoeffectivelymeetinginvestmentneeds.Advocatesforbreakinguplargefinancialinstitutionsshouldaskthemselves:WillregionalbanksorbanksrestrainedwithinU.S.borderscompeteagainsttheiralreadylargerEuropean,ChineseandJapanesecompetitors?Agrowing,complexglobaleconomyrequiresglobalbanks.ExcellentsmallbanksandAmericasregionalbanksarenotequippedtohandlefinancialtransactionsonthisscaleandinallcornersoftheglobe.Insteadofbreakingupbanks,letsinsteadregulatebanksinawaythatimprovessafetyandsoundnessbyfocusingoncapitallevels(andqualityofcapital),liquidityandtransparency.TonyFrattoisaManagingPartneratHamiltonPlaceStrategies,formerAssistant

SecretaryattheU.S.TreasuryDepartment,andaformerWhiteHouseofficial.Heis

alsoanon-aircontributorforCNBC.