Big Banks Make Big Cuts
Critics think the biggest banks in this country are too big. So do the biggest banks, it turns out. They’re cutting, big time. Bank of America Corp. last fall announced the whopper of all job cuts: 30,000 positions during the next few years, or about 10 percent of its work force. The goal: $5 billion per year in expense reductions by 2014.
Citigroup Inc. will eliminate 4,500 jobs during the next few quarters and plans to cut about $2 billion annually from the expense line, or 3 percent to 5 percent off a base of $48 billion to $50 billion.
Banks are realizing they’ve entered an era of low growth, higher capital demands and lower profitability. All of that is focusing attention on the expense line.
The biggest banks also have been clobbered in the stock market through last year and Europe’s debt crisis is weighing heavily on them. The capital markets business is doing poorly—trading revenues were down along with the dismal stock market late last year and investment banking revenues were hurt by the near standstill in initial public offerings and mergers and acquisitions.
“What happens with the situation in Europe is affecting parts of the banking industry and that’s a big risk going forward,” says Marisa Di Natale, a director at Moody’s Analytics in West Chester, Pennsylvania, who tracks bank employment levels. “We don’t expect that to be resolved any time soon.”
Regulatory reform and increased attention to risk are causing job gains in risk management and compliance, but not in trading, she says.
Employment growth in banking has been nearly flat during the last year, Di Natale says, reaching 2.55 million people employed in November, and she expects it to be nearly flat this year.
But the weakness in the sector won’t be equally spread out.
Banks that fund middle-market companies are doing better than most, says Richard Lipstein, who focuses on financial institutions as a managing director of executive search firm Boyden Global Executive Search. Investment banking is hurt worse than the retail banking side, he says. The investment banking people who execute deals rather than bring in business are the ones most vulnerable to cuts, he says.
Investment bank Morgan Stanley in December announced plans to cut 1,600 jobs, or about 2.6 percent of its workforce.
Bigger banks will be cutting jobs more than regional banks in general, says Scott Siefers, a New York City-based managing director and analyst at Sandler O’Neill + Partners. Regional banks are cutting 1 percent to 3 percent, he says, meaning that some of the jobs may be moving from the money center banks to smaller, regional hubs.
“It’s a tough environment to find a job,’’ Lipstein says. “If you have real skills and the achievement in generating revenue and good relationships, the chances are good that you will find a job. It may be outside the area where you live, however.”
Stock Market Drives D&O Pricing
First the good news: prices for directors and officers liability insurance fell during the third quarter of 2011. Now the bad news: they’re heading back up.
That’s according to Aon Corp., an insurance broker that tracks D&O pricing for a variety of industries.
Falling stock prices tend to encourage securities litigation, says David Payne, a managing director at Aon Risk Solutions, a part of Chicago-based Aon Corp. And insurance carriers hate securities litigation.
Aon has found that a reverse relationship exists between D&O premiums and the Dow Jones Industrial Average. D&O prices for financial companies and companies in general tend to climb following a stock market drop and they tend to drop after an improvement in the stock market.
Following an improvement in stock prices through early last year, the average price for $1 million worth of coverage in all industries fell 11.6 percent in the third quarter. For financials, it fell even more, 19 percent year-over-year, the eighth consecutive quarterly price drop for the sector, as the pace of bank failures slowed. The average annual premium for $10 million worth of D&O insurance for a healthy bank with less than $5 billion in assets is $120,000 to $200,000, Aon says.
But if history is any guide, the dismal stock market is going to lead to around 5 percent higher pricing this year, Payne says.
Was Bank Transfer Day a Dud? Maybe Not
Bank Transfer Day—the highly publicized, Facebook-fueled movement that campaigned for consumers to transfer their funds from big banks to small banks and credit unions—did provide a noticeable spike in account openings for small community banks and credit unions. However, big banks saw an increase in new account openings as well—which makes one wonder just what the protest accomplished.
The Bank Transfer Day organizers might still have the last laugh if their protest sparks an ongoing dialogue about the extent to which banks can, or should, be regulated. “Obviously, the short run impact of [Bank Transfer Day] was trivial,” says Art Carden, a professor of economics at Rhodes College and contributor for Forbes.com. “The educational impact, however, will get people talking more about, and thinking harder about, how the banking system actually works.”
One aspect of this system people are thinking harder about is the perceived difficulty of closing and transferring accounts.
“Consumers are reluctant to change banks because of the nuisance it involves,” says Rep. Brad Miller (D-North Carolina), in explaining the need for his Freedom and Mobility in Banking Act. “Normal market forces do not apply.”
Rep. Miller’s bill, which like Bank Transfer Day originated as a response to plans by Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. to impose new debit card fees ranging from $3 to $5, would shift most of the burden of bank transfers away from consumers toward banks. If passed in its current form, the bill would amend the Federal Deposit Insurance Act to require that insured depository institutions eliminate any fees associated with account closures, accept closures by remote or electronic means (stipulations apply), notify exiting customers of any preauthorized recurring debit, transfer direct deposits to a new account free of charge for 30 days, and give consumers 30 days to pay an outstanding balance before alerting any consumer reporting agency.
Rep. Miller contends that adding these provisions, along with “standardized, plain-English disclosures” from banks, would ultimately provide an advantage for customers by creating truer competition in consumer banking. “If it was easy to know what banks offer and what they charged for it, and it was easy to move accounts, then it would benefit consumers greatly,” he says.
Jeff Sigmund, the senior director of public relations at the American Bankers Association, offers a much different take on the issue of account closures and transfers. “Consumers have many choices in the marketplace, and it’s easy to close accounts. In fact, some banks already offer switch kits to make the process easy. The bigger question is, do we really need government to come in and protect consumers from something that isn’t really a problem? Doing so will just drive up the costs of banks, and ultimately, the costs to consumers,” he says.
This kind of dialogue could serve as a double-edged sword for the banking industry. “It’s the sort of thing that gets people talking, and of course people could be talking and learning entirely the wrong things, or people could be talking and realizing ‘Great, this is how financial mediation works, it’s not the system of corruption and evil that I thought it was,’” says Carden.
The banking industry should not only pay attention to what’s being said about Bank Transfer Day and The Freedom and Mobility in Banking Act but also who might be listening—namely, regulators. Rep. Miller explains how his bill might affect changes in closure and transfer practices even if the bill doesn’t pass.
“We’ve begun this debate by introducing this bill, but it may not come to vote, and it certainly may not become law for some time, but it also supports the [Consumer Financial Protection Bureau’s] efforts. The CFPB does have regulatory authority to first of all require standardized understandable disclosures so people can comparison shop between different banks and credit unions. The CFPB probably also has regulatory authority to address some of the issues in closing accounts and transferring accounts,” he says.
While this bill may ultimately prove ineffectual, dismissing it would be a mistake, especially in light of recent regulations, says Scott Siefers, an analyst at Sandler O’Neill + Partners.
“Unfortunately, if you can pass a Durbin Amendment, it suggests to me you can pass just about anything,’’ he says. “In this kind of populist environment it’s tough to write off any legislation that’s regressive towards banking institutions.”
A story entitled “Where Will the Revenue Come From?” in the fourth quarter issue should have stated that Wells Fargo & Co. estimated losing $250 million in quarterly income as a result of the Durbin amendment at the time of publication. Also, the Board Compensation Survey published in the fourth quarter issue used an incorrect methodology for calculating total director compensation in the table on page 63. We apologize for the errors and have corrected the table below.