Photo: Lisa Du, Business Insider
Large banks risk getting caught in “perpetual” cycle of bankruptcy like aerospace companies and carmakers unless they radically alter the way they do business, according to a leading industry consultant.Alix Partners, one of the most influential advisers to senior banking executives, warns that global investment banks must tackle head-on issues such as bonuses and their addiction to the “steroids” of debt-fuelled growth.
“Just look at the auto manufacturing and commercial aviation industries, where over the past two decades, changes in regulatory and operating environments combined to render formerly solid businesses into perpetual wards of the bankruptcy court,” said the consultants.
According to Alix, investment banks still pay their staff far too much, pointing out that the “overpayment effect” last year was $18bn (£11bn), or close to 30pc of the world’s top 15 banks’ combined pre-tax profits.
Senior bankers agree lenders must change their ways if they are survive. The head of one major British bank said he agreed with the findings and that those businesses, which did not adapt to the new world, would “die”.
“There was a major change in 2008 and a lot of people seem to be acting like it never happened. The choice is pretty stark; you can either carry on as you are and disappear into irrelevance, or you can change. There is no other option,” he said.
Investment bank revenues have fallen by 31pc in the past three years as earnings have been hit by the combination of a slowing global growth and tougher and more costly regulation.
Despite efforts to cut costs that have seen average bonuses halve between 2007 and 2011, Alix Partners said this was just “protracting the slow, but inevitable, disappearance into irrelevance of a business that badly needs to be reinvented”.
Alix recommends that global investment banks should consider “breaking up” their businesses before they are forced to by regulators. To do this, it says banks need not pursue full separation, but could allow the creation of “internal marketplace”.
In practice, this would mean banks unbundling some of the services they currently provide, cooperating more with rivals to reduce costs, and outsourcing operations.
In Britain, Barclays is currently in the middle of a strategic review commissioned by its new chief executive, Antony Jenkins, that is expected to lead to a radical overhaul of its investment banking arm and the rest of its business.
Meanwhile, Royal Bank of Scotland remains under pressure from the Government to continue shrinking its investment bank, as well as considering selling off large parts of its international business, including its US retail bank.
However, while British lenders have been at the vanguard of the change, many banks remain relatively unchanged four years on from the financial crisis that saw several investment banks become extinct.
“In fact, it seems the current taxonomy of business models could have been written in 2007, with just a few amendments,” said Alix Partners.
Business Insider Emails & Alerts
Site highlights each day to your inbox.