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With debate continuing over the banking industry’s future, size doesn’t matter as much as complexity, according to Citigroup chairman Sir Win Bischoff.
“I’m asked quite often, are institutions too large to manage? What is undoubtedly true is that large institutions — complex institutions — require superior management,” Bischoff said. “You need rules that have stood the test of time. What we have seen is institutions that aren’t necessarily too large, but that have become very complex.”
Bischoff, who had a 44-year career in financial services and was awarded a knighthood in 2000, spent the last year and a half leading Citi’s attempts to maintain its stature as the world’s largest bank. Following recent struggles and strategy changes, he is set to retire from Citi’s Board of Directors at Citi’s annual meeting in April 2009 and will be succeeded by Richard Parsons as chairman as of February 23. On February 3, he discussed his views on the financial services industry with dean Edward Snyder at Harper Center in the first of the student-led Graduate Business Council’s 2009 Distinguished Speaker Series.
While “complexity can be an enemy to good performance,” Bischoff said, he agreed with other bankers that size offers flexibility of a big balance sheet. “You will not have only small banks,” Bischoff said, but large and medium ones, too, as is the case in other industries.
Bischoff predicted banking will revert to a simpler structure that was more common 50 years ago. Institutions will lean more toward such functions as lending money, dealing in foreign exchange and intermediating, rather than the “very complex, very difficult alphabet soup” of such financial mechanisms as collateral debt obligations (CDOs), he said.
This downturn in the economic cycle “is particularly virulent because it’s so global,” Bischoff said. Some people believed the crisis in the United States wouldn’t spread to other countries like China and Japan, but he wasn’t among them, he said.
Bischoff said banks share some percentage of blame for the crisis.
“There was a collective view that on the whole, because of the vast amounts of liquidity in the system, asset prices could only rise,” he said. That view was coupled with a failure to realize three or four years ago that the system was “getting into this dangerous stage of excessive leverage.”
Errors can occur in the system when the natural movement to invest funds sometimes “gives way to greed and irrational behavior,” Bischoff said.
Snyder pointed out, “We should keep in mind the difference between market mistakes and market failure.” Actions will have to be sorted through to see which require public policy interventions and which don’t, he said, noting that a useful guide might be to determine whether or not people have learned from their mistakes or whether they will repeat them.
Bischoff said better — not more — regulations are needed. Regulations should hinge upon type of financial activity and not legal statements of financial institutions, he said.
For example, in the United States, “money market funds are enormously important to the liquidity of the banking system,” Bischoff said, and play many of the same roles as banks, yet “they’re relatively unregulated.”
Bischoff predicted: “Regulation may change, and that may actually help in terms of transparency.”
Various methods across the globe have been proposed to turn things around in the banking system, Bischoff said, from dealing with bad debt in order to take away market uncertainty, to forming aggregate banks, to accepting large infusions of government money. “There isn’t yet a template where you can say what actually is going to work best,” Bischoff said.
He said he is concerned that, for social and political reasons, banks that have received government money will limit themselves to using the money domestically rather than in fast-growing emerging and developing markets.
“I’m afraid you may almost get to a type of reverse Marshall Plan,” Bischoff said.
While the Marshall Plan to rebuild Europe after World War II was a “magnanimous gesture,” it also led to rebuilt countries being able to buy American goods, he pointed out. “It was a duel relationship,” Bischoff said. “We have to be very careful in relation to the global nature of banking and financial services that we don’t denude the very fastest growing countries from the capital they need to develop and actually buy goods from other nations. It’s a difficult balance to get right.”
Second-year student Sri Malladi said Bischoff’s views clarified the question of whether the big bank model is sustainable going forward. “It is possible to have big banks,” Malladi said. “It is possible to have unified global institutions as long as there’s a way to manage all this complexity.”