It’s been 12 years since the repeal of the Glass-Steagall Act, separating commercial banks from the investment banking business. In a recent article in American Banker, Andrew Kahr looks at whether the shift towards proprietary trading and securities has produced a better crop of senior executives at these banks.
The fundamental shift, says Kahr, is that the big banks started behaving more like securities firms. For years, big commercial banks focused on building customer relationships with clients, in everything from retail bank accounts to corporate loans. While securities firms depend more on individual transactions such as proprietary trading and bond issuance.
Compared to banks, the business for securities firms is more cyclical and often more highly leveraged. Their competitive advantage relates to their trading strategies and creativity in issuing securities. Managers are well compensated, as long as they’re winning.
It’s no secret that investment bankers and traders have taken over the leadership of many of these big banks since the repeal of Glass-Steagall. Lloyd Blankfein at Goldman and Stuart Gulliver, the new chief of HSBC are notable examples. Gulliver’s first job at HSBC was in the trading room. “You were accountable for your own actions and you had to be quick,” he says.
The exception seems to be at Wells Fargo, where John Stumpf, the new CEO, worked his way up in retail banking and was recently executive vice president of community banking.
But Kahr predicts the march toward a securities orientation will continue at the major banks. Intensifying their focus on trading, securities issuance, and less on the development and nurturing of primary account relationships. He questions whether this orientation will lead to increased risks, the kind that triggered the recent credit crisis.
What’s your opinion? Do you think an investment banking job is the preferred training ground for a senior executive position at a bank, versus working your way up through commercial or retail banking? Or do you think being a proprietary trader at an investment bank gives you superior decision-making skills? Add your comments below.