The Big Bank Theory

William Laraque, Managing Director at US-International Trade Services

03.09.2015 01:00 am

Big Bank Update: Fined, But It's Business as Usual

The institutions have paid billions in penalties. Critics wonder if the levies will set them straight.

Sue Reisinger, Corporate Counsel

I reference this article from Corporatecounsel.com. Attribution to this copyrighted work is made in full at the bottom of the excerpt.

US-International Trade Services (USITS for short), my firm, has eminent counsel on board. Victor John Yannacone, Jr., provided this reference from which I excerpted the following in order to make my point. The full reference is too long for this blog post, thus this excerpt.

My point is simply that it behooves enterprises engaged in global trade to deal with individuals, organizations and banks that know what they are doing. To quote from Pygmalion and Shaw, "Those silly people don't know their own silly business."

Excerpt:

The Federal Reserve had a different idea about capital. On July 20 it enacted new regulations requiring eight of the largest U.S. banks, including JPMorgan Chase and Citibank, to significantly increase their capital or reduce their size. Because capital is an expensive funding source for a bank, the new rule will force the banks to make a tough choice. As Janet Yellen, chairwoman of the Fed, said in a statement: "They must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system."

Other experts say what's really needed is more bank transparency. McCormick's Cost Conduct Project is proposing banks present an annual "conduct costs report" as part of their annual reports. Project supporters say such transparency will help "to restore trust among investors and wider stakeholders."

But in the end, changes in technology may bring their own answer. Some experts say both sophisticated cybercrime and advancements in online transactions could accomplish what regulators and prosecutors so far haven't: convincing the institutions to downsize to a more manageable size. Experts suggest that big banks need to reduce size and shift resources to protect their core business from hackers.

Indeed, big banks are struggling with increasingly sophisticated cybercrime. In June, for example, federal prosecutors indicted a Turkish citizen known as "Segate" for allegedly organizing three worldwide cyberattacks that caused $55 million in losses on global financial institutions in mere hours. The attackers allegedly used sophisticated techniques to hack into the banking systems, steal prepaid debit card data and eliminate withdrawal limits.

New York state's Lawsky, for one, is deeply worried. His speech cited cyberterrorism as the most important issue that financial regulators face in 2015—and perhaps for years to come. "I am deeply worried that we are soon going to see a major cyberattack aimed at the financial system that is going to make all of us shudder. … We are concerned that within the next decade (or perhaps sooner) we will experience an Armageddon-type cyber event that causes a significant disruption in the financial system for a period of time—what some have termed a 'cyber 9/11.'"

The second big tech challenge for big banks has been tagged "FinTech." According to a recent report from the World Economic Forum and Deloitte Global, banks need to prepare themselves for a state of near-constant disruption as new technology helps smaller firms offer faster and cheaper financial services.

The report predicts the end of big, full-service banking. With that will come an era of increased specialization. Christopher Harvey, leader of Deloitte Global's financial services unit, said in a statement, "Global financial firms are operating in an increasingly disruptive environment, with new entrants and fierce competition becoming the norm."

Citing the report, Boston University's Hurley offered his own skeptical thoughts. "The big question in my mind," Hurley said, "is whether over the next five years the largest threat to the big banks comes from the disruptive effects of FinTech, or from their own ineptitude."