During the long upswing, second-tier and even third-tier banks felt they needed to offer every product in every part of the world. That led to inflated costs, unethical practices and now terrible returns. Last week’s bold move by UBS to hack back its fixed income division, with the loss of 10,000 jobs, exposes the myth of the so-called “full-service” firm.
The drive behind creating full-service firms was the idea that corporate and investor clients – say, Vodafone or BlackRock – wanted to get all their financial services from a single source. A further motivation was fear among commercial banks that they would be disintermediated by the capital markets. Corporate clients would finance themselves by issuing bonds to investors rather than borrowing from banks.
The full-service myth probably dates from at least the time of “Big Bang” in 1986, when London’s financial markets were deregulated. Over the past quarter of a century, the financial industry has been bulking up in investment banking either by acquiring rivals or by engaging in hiring sprees. UBS, for example, merged with Swiss Bank Corporation, which had already bought S.G. Warburg, and then acquired PaineWebber. It also made a disastrous push into fixed income trading, which cost its shareholders tens of billions of dollars.
Firms that had even less of a comparative advantage in investment banking, like Commerzbank, RBS and UniCredit, felt they had to be players too. One result was that pay across the industry went through the roof.
Another consequence was that there was pressure on bankers to thrust unsuitable products down clients’ throats. Sometimes, customers just had to put up with another visit from financiers hawking the same old ideas in glossy presentation packs. But the less sophisticated among them sometimes succumbed to the salesmens’ silken speeches, spawning scandals that have sullied the industry’s image.