Citibank is the most corrupt bank on Earth, but there are many other dirty banks far behind. A California judge has granted a preliminary approval for Wells Fargo & Co’s agreement to pay $142 million, and perhaps more, to customers whose credit scores were harmed by its employees creating fake accounts in their names, the bank said on Sunday.

Three formidable forces—a weak global economy, digitization, and regulation—threaten to significantly lower profits for the global banking industry over the next three years. Developed-market banks are most affected, with $90 billion, or 25 percent, of profits at risk, but emerging-market banks are also vulnerable, especially to the credit cycle. Countering these forces will require most banks to undertake a fundamental transformation centered on resilience, reorientation, and renewal. Bankers have to digitize completely, not just by putting on digital lipstick!

Of the major developed markets, the United States banking industry seems to be best positioned to face these headwinds, and the outcome of the recent presidential election has raised industry hopes of a more benign regulatory environment. Japanese and US banks have between $1 billion and $45 billion in profits at risk by 2020, depending on the extent of digital disruption. Yet after mitigation, their profitability would drop by only one percentage point to 8 percent for US banks and 5 percent in Japan. Banks in Europe and the United Kingdom have $35 billion, or 31 percent, of profits at risk; more severe digital disruption could further cut their profits from $110 billion today to $50 billion in 2020, and slice returns on equity (ROEs) in half to 1 to 2 percent by 2020, even after some mitigation efforts.

Wells Fargo has set aside that money to compensate customers who are part of a class-action lawsuit involving claims regarding consumer or small business bank accounts, credit cards or loans, as well as identity theft protection, between May 2002 and April of this year. It plans to begin reaching out to those affected customers soon.

In the “unlikely event” that there are so many claims, and there is not $25 million left over to distribute across all customers involved in the lawsuit, Wells Fargo said it will pay more. The bank reached the settlement in April, according to a regulatory filing, but the judge’s preliminary approval moves the deal to the next step.

Emerging-market banks face a different challenge. They are structurally more profitable than their developed-market counterparts, with ROEs well above the 10 percent cost of capital in most cases but vulnerable to the credit cycle. Brazil, China, and Russia could have $50 billion in profits at risk, with China comprising $47 billion. A slower growth scenario could result in additional credit losses of up to $250 billion, of which $220 billion would be in China, our report finds, but with their current high profitability of $320 billion, Chinese banks should be able to withstand these losses.

Banks must adapt to the reality of a macroeconomic environment that offers a number of risks and limited upside potential. Along with stagnating growth, banks face enormous challenges to digest the wave of postfinancial-crisis regulation, despite industry hopes of a more benign regulatory environment in the United States. Control costs in risk, finance, legal, and compliance have shot up in recent years. And additional proposals, termed “Basel IV,” are likely to include stricter capital requirements, more stress testing, and new guidelines for conduct and compliance risk.

Meanwhile the pressures of digitization, which boosts competition and compresses margins, are growing. Some emerging-market banks are managing well, offering innovative mobile services to customers. But our report finds that in the largest emerging markets, China and India, banks are losing ground to digital-commerce firms that have moved rapidly into banking.

In developed economies, digitization is impacting banks in three major ways. First, regulators, who were initially more conservative about the entry of nonbanks into financial services, are now gradually opening up. Over time, huge tech companies may be able to insert themselves between banks and their customers, capturing the vital customer relationship and presenting an existential threat. On the positive front, a number of banks are teaming up with fintech and digital firms, using big data and analytics to sharpen risk assessment and drive revenue growth. Lastly, many banks have been able to digitize processes and dramatically lower costs in their middle and back offices (although digitization can sometimes add costs).

Countering the headwinds now gathering force means most banks will need to embark on a fundamental transformation that exceeds their previous efforts. Tinkering around the edges, as many banks have done for years, is not adequate to the scale of the task and will only exacerbate the sense of fatigue that comes from years of one-off restructurings.

Resilience. Banks must ensure the short-term viability of their business through tactical measures to restore revenues, cut costs, and improve the health of the balance sheet. They need to protect revenues through repricing and greater intermediation, reduce short-term costs, manage capital and risk, and protect core business assets. Our report found that digitization is only the start of the answer on costs, with radical reductions in functional costs needed to fundamentally rebase the cost structure.

Reorientation. While the resilience agenda is defensive in nature, in reorientation, banks go on offense. They must reorient their business models to the customer and the new digital environment by establishing the bank as a platform for data and digital analytics and processes, and aggressively linking up with fintechs, platform providers, and other banks to share costs through industry utilities. They also need to streamline their operating models and IT structure and move toward a proactive regulatory strategy.

Renewal. The industry must move beyond traditional restructuring and renew the bank via new technological capabilities, as well as new organizational structures. Any new business model that banks design will likely require new technology and data skills, a different form of organization to support the frenetic pace of innovation, and shared vision and values across the organization to motivate, support, and enable this profound transformation.


The Glass-Steagall Act was enacted in 1933 in response to banking crises in the 1920s and early 1930s. It imposed the separation of commercial and investment banking. In 1999, after decades of incremental changes to the operation of the legislation, as well as significant shifts in the structure of the financial services industry, Glass-Steagall was partially repealed by the Gramm-Leach-Bliley Act.

When the United States suffered a severe financial crisis less than a decade later, some leapt to the conclusion that this repeal was at least partly to blame. Indeed, both the Republicans and the Democrats included the reinstatement of Glass-Steagall in their 2016 election platforms.

However, the argument that repealing Glass-Steagall caused the financial crisis, and that bringing it back would prevent future crises, is not supported by the facts. Glass-Steagall could not have prevented the bank failures of the 1920s and early 1930s had it been in force earlier, and it wouldn’t have averted the 2008 financial crisis had it stayed in force after 1999.

Widespread Depression-era bank failures were primarily due to the fragility of the banking system at that time. Regulations that prohibited branch banking meant that America’s banks were frequently very small, with undiversified loan portfolios tied to the local economy of specific regions. Persistent crop failures and falling real estate values pushed thousands of these banks over the edge. Loan-financed securities speculation—the target of Glass-Steagall—had very little to do with it.

Likewise, during the recent financial crisis, commercial bank failures were largely driven by credit losses on real estate loans. The banks that failed generally pursued high-risk business strategies that combined nontraditional funding sources with aggressive subprime lending. Glass-Steagall would not have stopped any of this. Nor could it have stopped standalone investment banks, such as Lehman Brothers, from running into trouble.

Ultimately, those who see a simple solution to our contemporary financial woes in repealing Gramm-Leach-Bliley and reimposing Glass-Steagall only betray their misunderstanding of both pieces of legislation. The causes of financial crises—past, present, and future—lie elsewhere.


Breaking with previous EU practice that depositors’ savings are sacrosanct, EU now robs depositors following the bail-in template of Cyprus. This unnerves depositors in Eurozone’s weaker economies fearing a precedent that ignites turmoil. Robbing depositors is definitely a no-no.

Robbing depositors is the worst possible strategy. Making savers pay is extremely dangerous. It shakes the trust of depositors across EU. Europe’s citizens now have to fear for their money. Depositors in PIGS and other crisis-plagued countries make a run on their accounts because they, too, might have to pay someday. Depositors across Europe run on banks, and rescue gets a lot more expensive.

A dangerous ridiculous precedent has been set. European countries are very calm thinking it could never happen to them. But we’ll all get involved sooner or later. Robbing depositors undermines banks in PIGS. The unprecedented move is an extreme measure, and spreads big panic across the PIGS.

There are many signs of public alarm, and banks and state authorities are quick to hoodwink reassurance. The scope of potential contagion to PIGS in terms of deposit outflows and sovereign debt is very high. There are bank runs in PIGS right now.

The robbery of depositors was not a one-off measure for Cyprus, and it has major implications for all European deposit holders. When you accept a solution that steals forty percent of deposits, you set a dangerous precedent. If we get into deeper trouble, they may try to take a hundred percent. Eurozone has deteriorated to a robber of depositors!

The robbery of Cypriot depositors can’t be viewed in isolation. The signals sent to PIGS and to foreign depositors are unmistakable. Although Eurokleptocrats tried to present this as a one-off, they were not willing to rule out similar measures elsewhere – not that it would have mattered much, as the trust is gone anyway. If you can do this once, you can do it again. After you rob them in cold blood, you give them a few crumbs!

Politicians inevitably delay until almost the last possible moment before bailing out firms because it is deeply, deeply unpopular. Its unpopularity outlives the relief at the world being saved. And it is unpopular for good reasons. It is unfair. And it makes the world riskier because financiers can expect to get rich during the good times without sharing the disciplines of the market during the bad times.


Hard statistics and an understanding of culture keep the money flowing between lenders and borrowers. Trust, essential for any financial transaction, may be what truly makes the world go around. Trustworthiness pays off, especially in the midst of uncertainty.

Nonbank shadow lenders write 38% of all home loans and they originate a staggering 75% of all loans to low-income borrowers insured by the Federal Housing Administration. Shadow banks lend money like regular banks but don’t use bank deposits to finance that lending. They also aren’t subject to most traditional bank regulation. In part because of lighter regulation, as well as technological advantages, shadow lenders have enjoyed spectacular growth at the expense of their brick-and-mortar rivals. Quicken Loans, which owns the online lender Rocket Mortgage, has grown ten-fold since 2008 and is now among the three biggest mortgage originators in the nation.

The shadow lenders have dramatically stepped up their loans to riskier borrowers with lower incomes and credit scores. The shadow banks are at least as dependent on federal backstops and guarantees as traditional banks are.

Shadow lenders immediately resell almost all the loans they originate, and they sell about 85% of those mortgages to government-controlled entities, such as Fannie Mae and Freddie Mac. Although shadow lenders have dramatically stepped up their loans to riskier borrowers, they remain dependent on federal backstops, just as traditional banks do.

If borrowers default on those loans, taxpayers are stuck with the bill. The U.S. Justice Department sued Quicken for millions of dollars in FHA-insured loans that went bad, accusing the company of misrepresenting borrowers’ income and credit scores in order to qualify their mortgages for FHA insurance. The company has denied any wrongdoing and is fighting the charges.

Traditional banks also can leave taxpayers on the hook, the researchers note. Although banks keep about 25% of the mortgages they originate, they finance much of that lending from federally insured customer deposits. If a bank fails, the government pays to keep the depositors whole.

Online lenders charge slightly more to higher-income borrowers, apparently because those customers are willing to pay a premium for the convenience of push-button loan processing. For less affluent customers, who are more cost-conscious, shadow banks charge about the same as traditional banks.

The shadow banks’ primary advantage is analogous to one of Uber’s initial advantages over traditional taxi services: less regulation. After the financial crisis, Congress and regulatory agencies cracked down on traditional banks. They increased capital requirements, tightened enforcement, and paved the way for huge lawsuits against many of the biggest banks. The shadow lenders escaped most of that.

Regulators cracked down especially hard on banks that were active in the cities and communities that were hardest hit by defaults. Many of those communities were dominated by lower-income families and minorities. Sure enough, traditional banks retreated from those markets and shadow lenders moved in, the study shows. Shadow lenders increased their presence in counties with lower median incomes, higher unemployment, and higher percentages of African-Americans and other minorities. The researchers calculated that counties with higher unemployment generally had a higher penetration by shadow banks. The most startling shift was in FHA loans, which are generally made to people with lower incomes and weaker credit ratings. There, shadow banks increased their share of loan originations from 20% in 2007 to 75% in 2015.

Shadow banks also made inroads among affluent borrowers. That was especially true for the tech-driven online lenders, such as Quicken’s Rocket Mortgage. Online lenders, which account for about one-third of shadow lending, increased their share of “conforming” mortgages (those that Fannie Mae or Freddie Mac will insure) from 5% in 2007 to 15% in 2015. The online shadow lenders had a noticeably higher presence in counties with higher incomes and education levels.

Overall, the regulatory advantages account for about 55% of the growth in shadow banking, while technology advantages account for 35%. It’s still unclear whether shadow banks are a force of entrepreneurial innovation or another example of unregulated players plunging headlong into a wave of recklessness. But one thing is certain: For all of their entrepreneurial prowess, shadow banks depend on government backstops every bit as much as their old-fashioned rivals do. If you remove the government guarantees, the bailouts, and the subsidies, it’s not at all clear the shadow banks would step in to fill the breech. Bailouts and subsidies impact the entire chain of intermediation. They not only affect ordinary banks but also shadow banks.

Wells Fargo has previously said thousands of branch employees created as many as 2.1 million bank and credit card accounts in individuals’ names without their permission to artificially hit sales goals. Lawyers representing the claimants said 3.5 million accounts were created, according to a May 12 story by the Los Angeles Times.

If U.S. District Judge Vince Chhabria grants final approval to the deal, it could help Wells Fargo chip away at a bevy of legal and regulatory issues stemming from the scandal, which erupted in September after it reached a $185 million settlement with a Los Angeles prosecutor and the Consumer Financial Protection Bureau.

Wells still faces probes from federal, state and local government agencies, including the U.S. Department of Justice, as well as a number of private lawsuits, according to its quarterly securities filing in May.

In a statement, the bank’s chief executive, Tim Sloan, said he was “pleased” that the court approved the preliminary settlement and considered it “a major milestone in our efforts to make things right for our customers.”

If the agreement receives final approval the bank expects it will close out the vast majority of claims in 10 class action lawsuits related to the one it is trying to settle.


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