Magazine article American Banker

Risks, Regs Behind Jump in Banks Seeking to Shed Businesses

Magazine article American Banker

Risks, Regs Behind Jump in Banks Seeking to Shed Businesses

Article excerpt

Byline: Chris Cumming

When JPMorgan Chase (JPM) announced last week that it plans to sell or spin off its commodities unit in response to growing regulatory pressure, it joined a swelling crowd of banks backing away from noncore operations.

A new survey shows just how large the exodus has become: 44% of banks say that concerns about risk are forcing them to exit lines of business.

The Institute of International Finance and EY, formerly Ernst & Young, released their fourth annual risk management report on Tuesday. The survey of 74 banks in 34 countries found that many are shedding some businesses in response to increased regulatory oversight.

"Banks are pulling out of peripheral activities and returning to their core," Patricia Jackson, EY's head of financial regulatory advice for Europe, the Middle East, India and Africa, said at a press briefing. She directed the study.

Economic as well regulatory pressures are behind such pullbacks; banks are realizing that "[y]ou can't afford to be the fifth-largest anymore" in peripheral businesses, she said.

The percentage of banks surveyed that said that they were leaving a line of business increased from 29% a year ago. In addition, 75% of North American banks said they are exiting businesses in some geographical areas, up from 50% a year ago, and 81% reported that they are evaluating their portfolios, up from 62%.

The pullback clears space for nonbank financial firms, such as insurance companies and private-equity firms, to lend in areas that banks are leaving.

"I think in the next ten years we'll see a huge shift toward core banking, and with it a rise in shadow banking," Rick Waugh, the chief executive of Scotiabank and vice chairman of the Institute of International Finance, said at the briefing.

The streamlining push is largely a response to Basel III requirements over how much capital banks must hold, according to the survey. …

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