Following the financial crisis of the 2000's, many now view big banks as trustworthy, foolproof institutions. However, that may not be the case. A recent Harvard University study indicates that markets now see banks as much more likely now to lose half their market value than before the crisis. The study, conducted by Natasha Sarin and former Treasury Secretary Larry Summers, also indicated a decent decrease in the ratio of banks' market value to the value their books say they are worth.
The sudden resignation of Wells Fargo & Co.’s chief, John Stumpf , and the turmoil engulfing Deutsche Bank, tell a dark story. In different ways, they show how much harder it has become for banks to make money. The stock market suggests banks aren’t expected to earn much more than what investors charge them for capital in the foreseeable future. Blame rock-bottom or negative interest rates, tougher regulation and weak economic growth. An industry that can’t earn more than its cost of capital is an industry destined to shrink. This matters to more than just the banks and their shareholders. When central banks ease the supply of credit, they rely on banks to transmit the benefits to the broader economy by making loans, handling trades and moving money between people, companies and countries. Shrinking, unprofitable banks hobble that transmission channel.