Private banks have abandoned direct management

For Christophe Tadié, partner at bath, private banks will have to adapt their costs and revising their economic model.

Why is the world of private banking on the front line in the Madoff case

The cause is historical. First investors have invested in "hedge funds" or "private equity" are the teams of the "family offices" in the service of large families or wealthy private individuals. These private investors represent still today a little more than half of the stock of "hedge funds". The "family offices" do not directly manage: selecting managers and they provide access to closed investment funds whose capacity is limited by definition and select investors. And, in recent years, most private banks have oriented their wealthy clients this type of alternative strategies, directly or through a Fund of funds.

What lessons to draw from this case for banks

Not the reputation of a closed Fund provides drive of "screenings", assessments or comprehensive due diligence. Therefore have the infrastructure and the cockpit or then find competent partners. Because the distributor of funds has a duty to advise. And, behind him, there is a chain of providers, conservatives ("custodians"), lending banks, regulators, who will also have to get back into question. Private banks have abandoned direct management. They are squeezed between specialized actors and their clients or customers advice. I think that they must reinvent the financial crisis and this issue seems even stronger on the Madoff case.

The private bank it better resisted that other activities

In fact, the private bank is quite immune against the crisis, for two reasons. First, the decline of markets decreased volumes of managed capital. This mechanically affect revenues, particularly for independent institutions, with a good part of the compensation comes from management under mandate of portfolio shares. Then, the crisis of confidence in banks in General led to a breakdown of the heritage between institutions and output massive capital, several tens of billions of euros, outside of those more severely affected by the crisis. This distrust of banks and the dissatisfaction of some clients, convinced that their banker breached its duty of Council is a great novelty of the current crisis relative to that which followed the collapse of the dot-com bubble at the beginning of the Decade.

For accounts of operations, what are the consequences in the short term

It weighs on the revenue of banks. Where the turnover of private banks could be in the order of 1 of the outstanding managed before the crisis, towards 0.7. If one adds the stock because the markets lower, turnover may decrease significantly, from 30 to 50. It highlights the issues of flexibility in the cost structure. These issues are quite different from one bank to another. Independent or "traditional" banks had before the crisis of the coefficients of operation of the order of 75 to 80, higher than the banks more integrated large networks. Could attend plans to reduce costs and staffing, particularly in the support functions potentially. The customer relationship will be more likely spared but a reflection on patterns of remuneration will take place.

Expect to disappearances of actors, concentrations

In France, the banking sector is already highly concentrated. There are more independent actors in other European countries. But mergers and acquisitions operations are made more complicated by the crisis because the shareholders are very looking on the risks.