In the United States, banks are starting to separate their commercial and investment banking operations. According to banking analyst Meredith Whitney, there’s no need for any radical breakup as suggested by former Citigroup chairman Sandy Weill.
Whitney is the founder of the Meredith Whitney Advisory Group. She said that any draconian moves to split up banks are unnecessary. Weill earlier told CNBC that he thinks it’s the right time to break up big banks to prevent a repeat of the large taxpayer bailouts that happened during the 2008 financial crisis.
Weill didn’t specify it but his advice suggested going back to the Glass-Steagall Act, which is the Depression-era law that separated commercial and investment banking. It was rescinded by Congress in 1999.
Whitney said that the end of the Glass-Steagall law was bad for banks. It destroyed pricing, from mortgages to credit cards. She added that the pricing model for financial services should be re-established.
Whitney maintained that the more profitable business, such as cash management and asset management, are just small part of large banks. Most of the banks have been built up in the capital markets business to support what is now a broken business.
Whitney said that you should be a profitable making businesses and not loss-leading businesses. If you’re not making money then you’re in the wrong industry and should get out of it. She is not a strong buyer of banks. She said that the industry has no momentum. You’re wouldn’t get paid to wait because the dividends are only marginally attraction and there are risks involved.
According to Whitney, big banks should be reconstructed completely and they need to go back to the basics to be profitable. Once this is done then the banking industry will gain the momentum they need to be more profitable again.