Tuesday, April 12, 2016

Watch Bank Earnings!

Commercial banking in the US is a dying industry.  Stripped by law of most of their most profitable businesses and drowned in paperwork with what remains, commercial bank shares are trading at multiples that seem to surprise Wall Street analysts. 

There is not much mystery here.  The overreach of the Dodd-Frank legislation and its accompanying 60,000 plus new regulations imposed on the banking community has all but eliminated most of the traditional profit centers for banks.  As a by-product, commercial lending has grown at a snails pace since the 2007-08 debacle, which is one of the key reasons that economic growth has been so meager.

Jamie Dimon, the CEO of JP Morgan commented last year that his firm has hired more than 30,000 new compliance officers since 2008, thanks to Dodd-Frank.  Meanwhile, JP Morgan's profitability has suffered.  When the leading employment gains are in compliance officers, you know the business is in trouble.  And, indeed it is.

What will happen is that all of the businesses that used to be performed in commercial banks will move to other venues -- after all, there is still a need for these businesses.  Additionally, many of those businesses will move offshore to more hospitable regulatory climates. 

America has become a tough place to do business.  The new frontier is likely to be Asia, as the western countries slide into irrelevance.

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