Regulation Pressures Depress Bank Profitability

“Nobody is going to invest in an industry with returns of 5 percent,” this from Christopher Flowers, a US private equity investor who specializes in financial services. As reported by the Financial Times, Mr. Flowers names regulation as the primary reason that banks profits have taken such a hit, “All the rules we’ve introduced have depressed profitability and that is a real vulnerability.”

When using the word “vulnerability,” Mr. Flowers referred to the fact that banks will be unable to raise capital should another financial crisis arise.

From this recent report in the Financial Times, a consultancy called EY did a review of the 200 biggest banks and discovered that the average return on equity was 9.74% in 2013. This number is just above the average cost of equity.

Christopher Flowers believes that trying to turn banks into a risk free business is just a waste of time and argues, “How do you make something that lends money at risk a utility?” This is a valid question, but as always, finding the balance between too much regulation and not enough regulation is an ongoing battle.

(Source: Financial Times: http://www.ft.com/intl/cms/s/0/455aabc4-0ff0-11e4-90c7-00144feabdc0.html?siteedition=intl#axzz387GJVFu7)

Posted by Corey Curwick Dutton