Universal banking

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Call it the dark side of the universe. Citigroup’s retreat from Germany – selling its consumer unit there to France’s Crédit Mutuel for €4.9bn on Friday – is the latest phase in chief executive Vikram Pandit’s plan to shrink Citi’s balance sheet, dump unprofitable client relationships and preserve liquidity following huge credit-related losses.

Citi’s woes have caused much soul searching about the universal banking model, which runs the full gamut of retail and wholesale services across multiple regions. UBS, similarly tarnished, has been under pressure from various quarters to break itself up. By taking greater risks through their securities businesses, the argument goes, universal banks increase the likelihood of losses for their depositors, while complicating the task of central banks in their capacity as lenders of last resort. And their very size concentrates power and curbs competition.

There is some truth in all of that. But the universal model is not the real culprit. During the US banking crisis of the 1930s, for example, advocates of reform blamed losses on the reckless behaviour of securities affiliates of the commercial banks: hence the Glass-Steagall Act of 1933 – repealed in 1999 – which enshrined the legal separation of commercial and investment banking.

Subsequent studies of the period, however, have shown that institutions without securities arms had a much greater tendency to fail than those that had them. The origins of the crisis were actually to be found in lax lending practices, sloppy internal controls and inadequate supervision of the banking industry in general. A similar picture is emerging from the current credit crunch where, so far, the casualties have been spread pretty evenly across brokers, mortgage houses, hedge funds and state-backed wholesale banks.

Like Sandy Weill and Chuck Prince before him, Mr Pandit is defiant in his defence of one-stop shopping. History is on his side. Big, global companies need big, global banks. The problem is in the management of the model, not the model itself.

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