Cause and Effect: If you build it, will they come?

July 23, 2014
/   Spotlight

Many financial institutions assume that digital banking is lucrative because the most valuable customers happen to bank online. While there is certainly a correlation between online bankers and higher profitability, quantitative evidence suggests that...

Fast Facts: Student Loans

January 22, 2013
/   Insights

The Financial Services Roundtable recently released another iteration of its Fast Facts, reliable, bullet-point research about issues facing the financial services industry. Topics span TARP, Dodd-Frank, insurance, lending, retirement savings and more.  Below are some updated Fast...

Intuit 2020 Report: The Future of Financial Services

April 11, 2011
/   Insights

Today, Intuit released the latest edition of the Intuit 2020 report, Intuit 2020 Report: The Future of Financial Services, which identifies and examines four key trend areas that will  transform the financial services industry...

Small Business: Perception vs. Reality

November 21, 2012
/   Insights

In the most recent election cycle, like most others before it, the one sector of the economy that got the most attention was small business.  This is the future, we were told by every...

The Top 10 Trends in the Digital Banking Industry

December 18, 2013
/   Spotlight

2014 is rapidly approaching and as the year wraps, the Digital Insight team has pulled together the top 10 trends in the digital banking industry based on data and trends from studying financial institutions....

Mobile Banking Engagement: Data from Digital Insight

June 24, 2013
/   Spotlight

Intuit Financial Services has been conducting a comprehensive and ongoing study of financial institution customers. From these studies, the company has been able to provide a deeper view of banking customer behavior across several...

Industry Perception, Optical Delusion

January 14, 2013
/   Insights

In Washington, they talk a lot about ‘optics.’ This has nothing to do with regulatory scrutiny, or government mandates on eyeglasses. It has to do with perception—how something looks, the way a particular story...

Social Banking: Blessing or Curse?

August 1, 2012
/   Insights

While the topic of Facebook and banking has generated plenty of heat (though not necessarily a lot of light), the debate seems mostly focused on two broad issues: The much-maligned IPO, and the notion...

As the clock ticks down to the ‘fiscal cliff,’ it’s been interesting to see the response from the banking community. For example, it was reported that at the urging of CEO James Gorman, more than 15,000  Morgan Stanley employees, nearly a third of the company’s workforce, had just sent letters to Congress asking for a “balanced” approach to the eventual deal (if there is one).

Of course, when it comes to the government, the industry has more on its mind than just a looming rise in tax rates and drop in spending. The separate-but-perhaps-related issues were on full display just a day earlier when the same CEO spoke at an industry conference—as comments will surely be of great interest to those same lawmakers currently huddled in negotiations.

“The economies of regional banks don’t add up,” Gorman noted. “There will be more consolidation.” While many bemoan the ‘too big to fail’ shape of the industry as it now exists, the U.S. banking industry actually needs larger financial services institutions with more assets and greater reach. Some recent deals prove his point. In November alone, Jeffries Group was acquired by its largest shareholder, Leucadia National Corp (LUK.N), specifically to assure investors of its staying power, and Stifel Financial acquired boutique investment bank KBW.

Despite its own impressive asset base, Morgan Stanley itself is far from immune to these pressures. The investment bank’s credit rating was downgraded earlier this year, in part because of concerns that it can’t compete with the likes of JPMorgan Chase in specific businesses. And at the same conference, Gorman acknowledged that Morgan Stanley is getting out of some markets, though he maintains that the company is not looking for a buyer.

This premise clearly runs counter to conventional wisdom, which holds that too many banks are already too big to fail. This was at the root of numerous debates during the recent election cycle, with continuing controversy over the massive bank bailouts initiated during the Bush administration. The promise, of course, was ‘never again.’ But when some institutions inevitably hit hard times and by dint of size alone threaten to jeopardize the entire financial system with an imminent collapse, what then?

It’s tempting to look overseas for pointers. Canada serves as prime example—it has a high degree of consolidation, yet was largely unaffected by the financial meltdown. By contrast, France remains a source of worry. A few banks there, also very consolidated, carry a huge amount of debt, and that may prove to be a problem both short- and long-term. The U.K. banking system has related concerns: The Bank of England just sent out a warning British banks need greater capitalization to defend against a euro zone fallout. In other words, they need to be bigger.

Of course, we’re not going to get the answers from any single source, especially one that’s overseas. The U.S. system is simply much larger than, and more competitive than, any other to make a direct comparison. It’s also subject to both regulatory compliance and free-market pressures that are essentially unique and always evolving.

The current angst over the fiscal cliff will eventually fade. Either a deal will get done with neither side being too happy about it, or a deal won’t get done and the spending cuts and automatic tax hikes will kick in, and Congress will be forced to develop new mandates. They may even find a way to kick the can down the road and put in temporary measures that don’t solve anything.

Whatever happens, there’s no question that we need a long-term outlook—the current agonizing over the Bush tax cuts and Obama stimulus packages serve to shine a spotlight on the state of the economy as a whole, and the banking industry’s role in it. Those writing in to Congress to ask for a ‘balanced’ approach are surely right. However, what that approach might mean for us—how big and how regulated we should be—remains a question in search of an answer.

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James W. Gabberty

Gabberty is a professor of information systems at Pace University in New York City. An alumnus of the Massachusetts Institute of Technology and New York University Polytechnic Institute, he has served as an expert witness in telecommunication and information security at the federal and state levels and holds numerous certifications from SANS & ISACA.

Marisa Mann

Marisa Mann brings over 15 years of experience in consulting and financial services industries to the Solstice team, working on large scale enterprise initiatives across many technologies, including specializing in the digital space – Internet and mobile. Mann is passionate about mobile and the endless possibilities for the enterprise, delivering business value through strong brand recognition and driving to excellence in the consumer experience. Prior to Solstice, Mann worked at JP Morgan Chase, Diamond Management and Technology Consultants, Washington Mutual, Inc, and Accenture.

Zachary Ehrlich

25-year-old writer, and as a native San Franciscan, I am unreasonably loyal to Bank of America, if only for their superhero-like origin story, involving the 1906 earthquake and Italian fruit vendors.

Brad Strothkamp

http://www.forrester.com/rb/analyst/brad_strothkamp