The sinners continue to repent in the great Investment Banking Reformation. The latest penitent is Andrea Orcel, the head of investment banking at UBS, who appeared before Britain’s Parliamentary Commission on Banking Standards and promised to ‘put integrity before profit.’ But it is brutal economics, not soul cleansing, that is changing UBS and other institutions.
Just a few hours away on the autobahn from Zurich, where UBS makes its headquarters, is the small German town of Wittenberg. And there in 1517, Martin Luther nailed his 95 Theses to the door of All Saints Church and sparked the Reformation.
All Saints Church, Wittenberg, Germany
Now, five centuries later, we have another reformation, this time of a secular kind, in banking. And UBS has been at its center, exposed for its many failings and for its bold decision to jettison its core fixed income businesses in a move to remake itself.
In an appearance worthy of Luther himself, Andrea Orcel the chief of investment banking at UBS, appeared at a parliamentary hearing in London this week and struck a note of contrition:
“We all got probably too arrogant, too self-convinced that things were correct the way they were – I think the industry has to change,” Mr Orcel admitted. UBS, he said, was “trying to recover the honour and standing that the organisation had in the past.”
Pledges to do better next time sound appealing in front of critical lawmakers, and just about every big bank has promised to reform their cultures (Barclays) and get tough on misbehavior (J.P. Morgan). But such assurances are not likely to bring significant changes to global banks. Brutal economics is driving it instead.
Orcel spoke just as a rival investment bank, Morgan Stanley, was announcing sweeping cuts to its securities division. Morgan Stanley’s restructuring follows similar moves first taken by UBS late last year and since followed by Credit Suisse, Deutsche Bank and Citigroup.
Banks are not simply tossing bankers into the streets to trim costs while waiting for an upturn. Their moves reflect a more fundamental shift in an environment where profitability has become much harder to find. Morgan Stanley, for example, is expected to show a return on equity of just three percent when it reports earnings next week, according to analyst estimates. That’s a far cry from returns of 20 percent and more in the boom years.
A flat yield curve and weak economic growth have done more to humble the banks than any amount of bashing from politicians and regulators.
(For earlier posts on the Investment Banking Reformation, see here and here.)