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Unless financial institutions to better demonstrate that they are useful to society, face a debilitating battle against the new regulation

Many say that banks moved away from its basic social function and focused on profit by any means possible

More than three years have put the world on the brink of economic collapse, banks are still having severe problems. Rather than recover from losses, now face a noisy European debt crisis.

Meanwhile, capitalism suffers a growing crisis of legitimacy since 2008, just when the movement went from Wall Street Occupy focus on bailouts and bloated salaries of bankers to be a global benchmark for complaints of "99%". However, it was inside of the banks where the crisis erupted and where his heart is still.

Their problems are not just financial. In the 90's and 2000, banks became a major force in Western economies. Its share of GDP rose sharply, Wall Street banks like Goldman Sachs extended its reach into Europe and Asia, the boundaries between commercial and investment banks were eroded, and the bankers were bulging pay packets until they had become glamorous.

Today, they have anger for having taxpayers hostage because they became "too big to fail". Many say that banks moved away from its basic social function, which is to promote growth by providing loans, placing securities and advising companies, and focused on profit by any means possible.

The hostile mood was exacerbated by wage practices initiated in Wall Street and the City of London after the deregulation in the seventies and eighties. Came the habit of copying the old half-paying corporate structures to investment banking officers and operators huge bonuses. Large financial institutions were able to absorb the gains from trading and risk-taking, while at the same time socializing their losses. "There is a profound question of legitimacy facing the banks," said Ranu Dayal, a partner at Boston Consulting Group. "The disgust with the banks will get worse if you are not reforms that have made and are fulfilling an important role in the economic revival, or that have gone bankrupt as a result of wage structures or simply because of their excessive greed," he said.

Unless we find a clear way to demonstrate its usefulness, and limit the practices most angry people in general, banks face a long and debilitating trench warfare against the new regulation. For economies, this could limit the beneficial aspects of a thriving financial sector and focused.

A delayed and hidden risk

For a long time, banks got into a wave of growth in credit markets (driven by the expansion of derivatives, the relaxation of the rules and capital standards, and the arrogant belief that they had, in some way, broke his old habit of losing billions of dollars in the crisis). That ended up being "both as a miracle mirage," concluded Andrew Haldane, Executive Director of the Bank of England. Instead, it turned out that most risks were simply postponed or even hidden from the directors of the banks. Adair Turner, chairman of the Financial Services Authority, Britain's main regulator, said last year: "Some financial activities ... further to add value in some way difficult to understand complex but in fact were created financial instability and economic damage. "

These dangers were not. "It totally confident that the risk had been transformed and we were banking on a paradigm different," said Philip Augar, author and former financial analyst with the City. "Everything was encouraged by government officials who listened to investment banking. I told them all they had to do was out of the way. "

Banks that relied on a series of business to make money, from advice on mergers and acquisitions until placement of securities, passed overwhelmingly by trading. The foreign exchange trading volumes increased 234 times between 1977 and 2010, while trading, particularly bonds and currencies, represented in 2010 to 80% of the income of the largest banks, according to BCG.

"People migrated from the traditional corporate banking and treasury stock and bonds to exotic products that require some understanding of risk," said Dayal.

That brought big profits for a while, but weakened the argument that they did something useful. "The investment banking industry away from its original focus, which was to raise capital for industry and providing consulting services," said Bob Gach, director of the consulting division of Accenture's capital markets.

Thomas Philippon, a professor at the Stern School at New York University, estimates that the sector's share of U.S. GDP increased from about 3% in 1950 to over 8% in 2010. Instead of resorting to heavy use information technology to be more efficient, as in the retailing sector, the banks simply widened.

Philippon argues that this growth was not accompanied trading or for the best pricing in the securities markets or for better financial security for industrial companies. "The more I look at the growth of trading, the more I am convinced that the company received nothing in return," he said.

This has important implications for governments. Central banks and governments have traditionally been willing to support the institutions that take deposits in times of crisis, the importance of a sound banking system.

Even that was lost. Central banks do not want to admit that any institution was too big to fail. And they certainly did not intend to cover securities brokers and investment banks that, since the Glass-Steagall Act of 1934, were deliberately separated in United States commercial banks.

The 2007-08 crisis destroyed that delicate balance, causing not only European governments bail out big banks, but leading to the U.S. Federal Reserve to extend the protection of its discount window to Goldman Sachs and Morgan Stanley. The old club ambiguity disappeared and protected from "systemically important financial institutions" expanded.

But just because a bank is systemically important (ie in case of bankruptcy would cause a serious disruption in financial markets) does not make it economically vital. The principal function of banks is the least glamorous is: take deposits and make loans. That was mixed with riskier activities related to trading so that now are difficult to disentangle.

Banks fight regulations such as the Volcker rule limiting trading with its own portfolio. "The regulatory agenda was too modest and the political power of the banks is incredible," said Simon Johnson, a professor at MTI Sloan School.

A long struggle not to change things and fight while regulation will do nothing for the legitimacy of the banks, and some of the economies in which they operate. Nor will do something for the need to restructure, which is driven by basic economic force: the financial pressures now faced by banks. Institutions such as UBS and Citigroup have difficulty recovering the losses recorded during the crisis and the banking industry as a whole lost 40,000 jobs last year. After recovery from 2008, when central banks cut interest rates, trading revenue fell sharply.

Banks could delay his departure from its current woes and hope that the memories are gone. But that outcome is all but guaranteed and it would be best for society as a whole. For a strong economy is vital to have healthy banking system, in size and scope.

Nor does the regulation is the only challenge facing banks, the market is putting even greater pressure to change their ways.

Meanwhile, corporate banking will weigh the excess capacity left by the years of growth. The entities taking of children prevented return on assets by taking more of them leveraged their balance sheets to raise its return on capital at historically high levels. While many banks have returns on capital only a single digit in the nineties, rose to 20% or more in the mid-2000s.

Diminishing returns

Despite the regulatory setback, central banks are imposing higher capital requirements and liquidity, which prevents them from leveraging as much. The market also apply greater discipline to institutions with highly leveraged balance sheets.

This is causing big problems for banks, which previously could compensate for the lower profitability of its main divisions assuming more risk and enlarging their balance sheets. Now, any bank that tries to do that, even if the regulator allowed it, you risk that credit rating fall to evaporate and access to finance.

If banks are not new revenues, the alternative is to lower costs, and reduced and fused as in other sectors. However, governments are reluctant to let them become too big to fail, and the current generation of senior bank executives do not know what work in a shrinking industry.

"This industry is run entirely by the wrong people," said Professor Hahn. "They're not idiots, but for three decades, with only a few short intervals, growing its business prospered and accumulated risk. The new system is based on efficiency and costs, and none of them know about it. "

Before the banks were encouraged to invest heavily in major new investment banking operations and to "steal" each other teams bench officers to stand out among global banks.

But now banks like UBS abandoned the strategy of "growth at any cost." Instead, they tried to focus on activities which have an advantage, such as retail banking, wealth management and specific areas such as custody of securities.

The combination of less leverage and limited ambition probably subtract profitability of banks. Dayal predicted that "if a business with a capital return on something less than 18% will have between 8% and 13% approximately." They look more like public service sector.

If shareholders are willing to accept lower returns, banks may be able to regain some social legitimacy. Those who focus on taking deposits and loans are more chances that governments deem important for the economic system. So the investment banks that focus on the placement of securities and advisory, rather than trading, will have a better story to tell.

The question is whether banks can change and if you will. Some are skeptical. "I do not think investment banking is over," said Augar. "It will be less profitable and smaller for a period and will be a while until we see many potential global banks trying again to occupy a chair at the big table. But do not take much. Will five years? "He said.