One of the few good, and surprising, things to happen as a result of Dodd-Frank and the re-regulation of the banking industry generally is that, for the first time in memory, the big banks are being run in a way that can honestly be described as “competently.” I’m not kidding.
I’ve made something of a career out of bashing the big banks, of course, so this change of heart of mine is as surprising to me as it might be to you. But there you are. Back in ‘80s, ‘90s, and early aughts, the focus of most big-bank CEOs was singular and laser-like: empire building. Hacks like Hugh McColl and Ed Crutchfield would dilute shareholders again and again by doing one dumb, expensive for-stock acquisition after another. Then in deal after deal, planned cost saves rarely met targets while promised “synergies” turned out to be a mirage. But the acquirers’ size and branch networks grew and grew—and so did the CEOs’ compensation. The stock price? That was another story. No matter. On to the next deal!
In retrospect, the mismanagement of the big banks was so widespread and went on for so long that it was enough to call into question the supposed clear-eyed efficiency of the equity capital markets. How could shareholders put up with all that? Perhaps worse, the institutions that resulted from the feeding frenzy ended up being mostly neglected by the people who were supposed to be running them. Management was out chasing the next deal, instead! So healthy management cultures never had a chance to develop. Bad habits appeared—like, say, the habit of chasing the Latest Hot Thing. Subprime mortgage lending, for instance.
But because of Dodd-Frank, those days are over. Size is anathema to banking regulators these days. Even if a big-bank CEO had the chutzpah to put together an old-fashioned blockbuster deal, the feds would shoot it down in two hearbeats. So what are bank CEOs to do, instead? Why, they can run their banks! And just about across the board, they’re doing a pretty good job at it. At Citigroup, for instance the two Mikes—Corbat and O’Neil—are systematically shedding assets and exiting superfluous businesses to focus on Citi’s core enterprises. That would have been unthinkable under Sandy Weill. There are even early signs that the company might finally show some systematic expense control. Brian Moynihan at Bank of America has successfully (albeit expensively) extricated the company from its post-bust legal wrangles and has gotten a good start on untangling the mess Hugh McColl created. PR problems of recent years notwithstanding, JPMorgan Chase under Jamie Dimon has never been stronger or better-run. And at Wells Fargo, well, Wells has always been a tight ship. Beyond the Big Four, meanwhile, the story is largely the same. Richard Davis at U.S. Bancorp and Bill Demchak at PNC are doing remarkable jobs in particular. More broadly, CEOs are doing a very good job at tending to business and extricating their companies from the lingering effects of the recession.
This is what happens when managements focus on running the business rather than size for its own sake. What’s more, big banks really do have some advantages over small banks they didn’t have before, that they can use to create a real competitive edge. Technology, for one thing. As tablet and other mobile-devices proliferate, the retail banking experience is more tech-intensive than it was even ten years ago. Big banks have the development budgets and tech expertise to develop solid consumer applications ahead of their smaller competitors. On the loan underwriting side of the business, meanwhile, economies in scale have long been in place. And don’t forget about all the new compliance spending mandated by Dodd-Frank. Larger banks can most easily shoulder that, too.
So for the first time that I can recall, big banks have a real edge and are being run by people who mean to make the most of it. Community banks have advantages of their own of course; the best-run among them aren’t going to be dislodged any time soon. But the competitive landscape is changing. Big-bank deals may be a thing of the past, but I doubt that, as many small banks see the fix they’re in, the steady drumbeat of small-bank M&A is going to end anytime soon. (For that matter, it’s no coincidence that the number of new-bank charters in 2014 added up to exactly zero; in the early 2000s, that number was routinely over 200 per year.)
As long as the people who run the big banks stay focused it’s their game to lose.
(Disclosure: We have a position in Bank of America.)
What do you think? Let me know!