Global regulators have issued dozens of rules aimed at making the biggest banks safer. That's leading to another result some wanted: making them shrink.

HSBC, Europe's biggest bank by market value, said last week it was considering "extreme solutions" for some of its units. Royal Bank of Scotland is reducing its US trading staff and getting out of two-thirds of the countries where it operates. JPMorgan Chase is closing branches, raising fees on some institutional deposits and looking for ways to shrink its trading businesses.

Increasingly strict capital rules over the past three years may be forcing the break-up of the financial "supermarkets" built in the decade before the financial crisis. Lenders, unable to use borrowed money to fund as much of their business as they once did, have cut profitability targets and are weighing more drastic actions to meet them.

"We're beginning to see discussions that these capital charges are sufficiently large it's causing those firms to think seriously about whether or not they should spin off some of their enterprises to reduce their systemic footprint," US Federal Reserve chairwoman Janet Yellen told the House Financial Services Committee on Wednesday. "And frankly, that's exactly what we want to see happen."

Banks have been cutting assets since the financial crisis, selling smaller units and unwinding derivatives that carried high capital charges. The latest moves represent a capitulation in which many of the largest banks may be ending their ambitions of offering all services in all regions.

Regulators' tools have included minimum capital ratios, stress tests and demands that more bank assets be the types that are easy to sell in a crisis. That combination, along with tepid economic growth and low trading levels, drove return on equity, a measure of profitability, to an average of 3.3 per cent last year at 10 of the largest banks, from 17 per cent in 2006.

"Banks certainly anticipated the direction of travel on capital rules, but with hindsight not the severity, which is why combined with low economic growth we are seeing repeated changes to strategies to try to improve return on equity," Nomura analyst Jon Peace said.

Source: http://www.scmp.com/business/banking-finance/article/1727049/stricter-capital-rules-force-big-banks-downsize-their
 

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