Investment banking practices, from unwise loans to the emphasis on derivatives, risk another financial crisis

It is hard to dispel the worry that there must be another financial crisis brewing as long as investment bankers believe that financial discipline and regulation only get in the way of profitable returns and great bonuses.

It’s rare in investment banking for an entire department to complain or mutiny because it’s usually easier to move to another bank than to reveal discontent. So it was a surprise that The Financial Times revealed in September that HSBC investment bankers claimed in a memo that its investment banking strategy had “utterly failed” and its “performance is really appalling”.

Then, last week HSBC released strong third-quarter results. Adjusted revenue rose 9 per cent, pre-tax profit was up 16 per cent, retail banking and wealth management profit rose 25 per cent and return on equity for the first nine months was 9 per cent compared to 8.2 per cent during the same period last year.

At issue is the level of capital allocation priority given to investment banking – a broad practice combining advisory services like mergers and acquisition, capital markets and IPOs. This complaint is not a plea for excellence, but rather ignorance of past banking sins.

Only 10 years after the global financial crisis, a new generation of bankers is afflicted with a cyclical, greedy disease that can only be described as “to be paid partner-like pay without assuming partner-like risk themselves”.

Last week, Deutsche Bank senior managers suffered an apoplectic fit of merger fever that its chief executive Christian Sewing had to douse it in the middle of discussing the bank’s disappointing third-quarter results. He snapped at speculation from his own top executives about a rumoured merger with Commerzbank.