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John Read, ex-Citi: “universal banking model is inherently unstable & unworkable”

The above quote from today’s Financial Times by John Read, the former chairman and chief executive of Citigroup, created by the merger of Citicorp Group when Glass-Steagall rules were removed, clinically describes the stresses and strains that most major banks groups are suffering and why many have had to restructure their businesses. Barclays, and Deutsche Bank are the latest examples.

For  Read, since 1999, two things have stood out:

  1. the belief that combining all types of finance into one institution would drive costs down – and the larger the institution more efficient it would be. He writes,  “ We now know that there are very few cost efficiencies come from management functions – indeed, maybe not at all. It is possible that combining so much in the single bank make services more expensive and if they were instead offered by smaller, specialised players.”
  2. mixing incompatible cultures is a problem all by itself. “It makes the entire finance industry more fragile.” 

He concludes that, “The universal banking model is inherently unstable and unworkable.” 

(Much more in the Financial Times article - recommended, ‘We were wrong about universal banking’.

Managing your large banks today

This is serious stuff. Although the impact of these pressures is going to vary considerably between banks, as they are very different with varying structures, resources and cultures. The general conclusion from this devastating analysis must be that the future of large universal banking groups will, at least, be more turbulent and will be accompanied by more bank restructuring and strategy changes in the future. John Read is pointing out some very basic pressures on large banks. The cost problems and cultural incompatibilities aren’t going to go away, if anything, they could get worse. 

So how do corporate protect themselves from the increased risk of banks changing their strategy and business focus? In a previous analysis, see, we highlighted the need to:

  1. understand the viability - both in the short-term and long-term - of your suppliers’ business model for the particular service and/or of the organisation, and assess how at risk your department is
  2. monitor for stability beyond financial data, including criminal and terrorists, and exposure to geopolitical threats, acts of nature, etc.
  3. cultivate strategic supplier relationships for the long-term using supplier scorecards for continuous improvement, and using benchmarks for measuring supplier performance
  4. have and/or develop alternative supplier options just in case, e.g. corporate treasury departments are accepting more bank relationships to minimise risk of ‘being left in the lurch’.

Over the last few months two new key corporate drivers to minimise supplier risk have emerged:

  • the need to ensure ease and speed of migration between suppliers/banks, e.g. corporates are now asking fundamental questions as to how they can redesign their systems and processes to do this
  • corporates are also looking for alternatives in all areas, e.g. in the new ecosystems which are now part of several TMS suppliers solutions, such as Reval’s TRM ecosystem, corporates are looking for alternatives for the key third party functions. 

CTMfile take: Welcome to the new normal in bank relationship management: 1) as always, look after your bank relationships, understand and cultivate them; and 2) have alternatives that you can migrate to cost-effectively and rapidly if needed.

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