Although there has been a lot of talk lately of breaking up big banks so the idea that they’re “too big to fail” doesn’t have an effect on the banks going to the governments to be bailed out every time they get in trouble, HSBC Holdings (NYSE: HBC) sees it differently, believing we’re going to enter into even more consolidation, as retail banking margins will continue to put downward pressure on profits, forcing continued cost-cutting measures in order survive and be profitable.
What HSBC is contending is scale will have to be attained or the banks may struggle to even survive in the regulatory environment they’re now facing.
Besides regulation, HSBC also said things like funding, liquidity, low interest rates, trust, among other elements, will continue to pressure retail banking for some time.
Bankers in the EU say that no matter what they do concerning breaking up banks, eventually market forces will inevitably bring consolidation to the industry.
The problem with that assessment is it in fact not market forces putting pressure to bring about more consolidation, but knee-jerk reactions by governments around the world trying to gain favor with their constituents which is generating that pressure. The market has long been out of the equation, and if market forces were truly part of it all, there would never have been banking bailouts in the first place and the poorly run banks would have folded, while the well-run banks thrived and picked up the pieces. That’s how the market works, not responses to government interference in the market.
Could more consolidation become a reality in this economic climate? It could once people get back on their feet and move their attention away from the banks and governments and on to their daily lives, which is what the banking industry and governments around the world are hoping for.
But if we haven’t learned yet that “too big to fail” and moral hazard aren’t something that should be allowed to affect decisions in and about the banking industry, we’re going to face this again, and next time (assuming we get through this now) it’s doubtful the economic system could survive that type of hit if banks are even bigger than they are today.
