The Wall Street Journal details the potential death spiral for the over regulated U.S banking industry.
The Institute of International Finance, which represents global banks, finds that since 2010, European, Japanese and U.S. banks have on average been earning less than their cost of capital.
Regulation is part of the reason. To better buffer loan losses, banks must now hold more capital such as shareholders’ equity, which spreads profits across more shares. To deal with sudden outflows of funds, they must hold more highly liquid short-term assets, such as Treasury bills, which earn less than loans.
Wells Fargo seemed to separate itself from its peers by boosting the number of products such as accounts and credit cards each customer bought. But in the process, many customers ended up with accounts and cards they didn’t want. Not only did that business earn nothing for Wells, it cost it a $185 million penalty, some $20 billion in market value and [CEO] Mr. Stumpf’s job, and triggered a Justice Department investigation.
Indeed, investors must now discount the possibility that any bank could be one scandal away from indictment and a crippling, multibillion-dollar fine.