Shrunken Citigroup Illustrates a Trend in U.S. Banks.
By Nathaniel Popper and Michael Corkery NEW YORK TIMES
Citigroup became the nation's first megabank some two decades ago by expanding into new businesses while pushing to knock down barriers that limited its size. A much different Citigroup was evident on Friday as it reported its quarterly results. Business lines like subprime lending, which used to define the company, have all but disappeared. Over the last seven years, Citigroup has sold more than 60 businesses, shedding retail bank branches from Boston to Pakistan. In all, the bank's holdings have shrunk by $700 billion - an amount roughly equivalent to Switzerland's economic output. The bank's chief executive said on Friday that since he took over in 2012, the company's work force had declined by 40,000 jobs, through layoffs or selling businesses.
On the campaign trail, and in the Democratic debate Thursday, the conversation has often returned to an assumption that very little has changed in the nation's banking system since the 2008 financial crisis. But Citigroup's financial results were one of many reminders this week of just how much success the government has already had in pushing banks to become simpler and safer, if not always smaller.
Bank of America and JPMorgan Chase, in their own earnings announcements this week, emphasized how much more of a financial cushion they had built up to protect themselves in a crisis, and how many risky businesses they had jettisoned. The bank presentations this week also indicated that even if Senator Bernie Sanders, Democrat of Vermont, does not win the White House - and is thwarted in his wish to break up the big banks - the companies will still face intense pressure from their regulators and their shareholders to shed more employees and business lines. On Thursday, Bank of America talked about the likelihood of further reductions, while Goldman Sachs is said to be embarking on its biggest cost-cutting campaign in years.
All of these moves are a testament to the power of the tools that the regulators have already used, and appear intent to continue using, to change the profile of the biggest American banks. Rather than simply telling the banks to shrink, regulators have used a set of sometimes arcane instruments - like capital requirements - that have quietly but significantly penalized the banks for their size and complexity, and required them to find ways to shrink on their own. Just this week, the top bank regulators wielded a relatively new tool when they told five of the eight largest banks that they needed to develop better plans for winding themselves down in case of a crisis. If the banks do not do so, the regulators threatened to force the banks to shrink even more.
Citigroup was the only one of the eight largest banks to have its plan, or so-called living will, approved by the Federal Reserve and the Federal Deposit Insurance Corporation, in large part because of the steps the bank has already taken to slim down. Like the other big banks, it is not yet out of the woods, however. Because of the regulatory penalties for being large, some on Wall Street are questioning whether even in its diminished state, Citigroup is still too large.
"You should be selling the silverware in the dining rooms or the paper clips from the desk or the desk chairs or the whole desk," the banking analyst Mike Mayo told Citigroup's top executives in a conference call Friday morning. Mr. Mayo's frustration is a response to the struggles of Citigroup and other banking giants to increase profits under the new regulatory burden they are facing. The results in the first quarter were among the weakest the big banks have reported since the financial crisis, as they struggled with a sluggish global economy and persistently low interest rates.
The challenges have pushed bank stocks down this year to their lowest level since 2012. That in turn, has forced bank executives to cut salaries and bonuses, and thousands of jobs, across their business lines.
Financial services nonetheless is still among the highest-paying sectors in the country. And more important, the big banks remain behemoths. JPMorgan Chase and Wells Fargo are bigger than they were before the financial crisis. At all the big banks, the risk-taking Wall Street operations still provide a major proportion of revenue and profit.
But all of that is being squeezed by the "vise that is the current regulatory environment," said Brian Kleinhanzl, an analyst with Keefe Bruyette & Woods, an investment bank. Mr. Kleinhanzl has said that Citigroup will probably have to eventually break into smaller pieces if it wants to increase growth under current regulations. Until now, many of the assets that large banks like Citigroup have sold have included a hodgepodge of businesses - student loans, an insurance unit and retail operations in far-flung corners or the developing world.
Mr. Kleinhanzl says the bank needs to take more drastic steps, making the case for Citigroup to split its consumer and corporate businesses into two separate companies or sell parts of its profitable Mexican unit. Still, the banks could get a reprieve from many of these pressures if a Republican wins the White House in November. All of the top Republican candidates have called for a reversal of the Dodd-Frank financial overhaul that has guided many of the recent regulatory actions. Citigroup and the other big banks continue to defend the economic importance of global banks with a wide array of business lines.
"We don't think it's the time to start selling the furniture," Citigroup's chief financial officer, John C. Gerspach, said in response to Mr. Mayo. But at more than a few points, hints of resignation crept into the presentations of the top bank executives as they spoke of the need to submit to the tightening regulatory vise. "We're trying to meet all the regulations, all the rules and all the requirements," JPMorgan's chief executive, Jamie Dimon, said on Thursday, after announcing one of the bank's worst quarters in years. "We've been doing that now for five or six years. It's six years since Dodd-Frank was passed; they have their job to do, and we have to conform to it.
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