Monday, April 27, 2009 0 comments ++[ CLICK TO COMMENT ]++

Sign of the times: some banks exiting proprietary trading

Not surprisingly, TD and CIBC, two major banks in Canada, are shrinking or shutting down their proprietary trading divisions:

As international policymakers prepare to force banks to reduce risky trading activity and embrace a more balanced business model, TD and CIBC are taking the leap on their own.

TD's Mr. Clark says his bank is going to give up the industry-wide practice of placing casino-like bets with the bank's own capital. The 61-year-old's decision to halt this profitable-but-risky activity -- known as proprietary trading--makes TD one of only two big banks in the world to make such an explicit pledge, along with Germany's Deutsche Bank.

Mr. Clark says the "wholesale" side of his bank, which advises institutional clients and handles market trades, should not behave like "a hedge fund in disguise."

He wants to stick to activity that produces economic value as the core of new banking model that is emerging from the financial crisis

"Our simple test is to ask: Would the Gross National Product of Canada go down if we eliminated our wholesale activity?" he says.

Unfortnately there may be some job losses for the traders but maybe they can find jobs in standalone firms or in the shadow banking system. I have never owned bank shares but I am not a fan of proprietary trading. I, like many sceptics, view it more akin to gambling with the house's money. When times are good they post high profits; but when times are bad, they can seriously hurt banks.

The impact of a shift away from trading will likely reduce future profitability.


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