So Lloyds Bank is to cut another 15,000 of its staff. The announcement came as something of a shock, notwithstanding the commitment of its new chief executive, António Horta-Osório, to cut costs by stripping out layers of middle management. Actually it is very interesting what he is doing and if successful, this programme will be a game-changer for banking more generally. Do banks need the management bureaucracy that they have built up in order to carry out their functions? Or could they deliver services as well, or maybe better, with far fewer people?
But there was something else that struck me as equally important. This was that Lloyds is withdrawing from roughly half the countries in which it at present operates. That echoes the rather less radical geographic retrenchment recently announced by HSBC. It is not quite a case of banks going home but it is very much one of banks not hanging on to markets where they cannot make a decent return on their capital.
This must make sense and not just for reasons of scale. One of the many lessons of the banking crisis was that the further banks range from their home base the more likely they are to make catastrophic mistakes: the German regional banks buying US sub-prime debt, European banks buying Greek bonds, HBOS lending to Irish property developers and so on. You have to ask what competences a foreign bank brings to enable it to be more successful than local ones. The record is not great.
If, however, all banks are going to be wary about overseas expansion and many will be in retreat, then I think we have to accept that banking will not provide much of a spur to economic expansion through the growth phase of this cycle. This will happen irrespective of government efforts to boost lending to small businesses, irrespective of additional capital requirements, irrespective of popular pressure. The banks won't disappear of course but the world will have to finance much of its growth in other ways.
This is a message for us here in the UK but it is really also a message for the world. Indeed a shift away from bank finance to other forms of finance is well under way. For example cash-rich companies are shifting the terms of payment with their suppliers and customers that are cash-poor. They are paying bills earlier or accepting later payment on invoices in return for a discount; in effect their treasury offices are performing a banking function.
There are, of course, limits to this type of arrangement. The main way in which expansion will have to be financed outside of the banks is through the securities markets, which works fine for large companies, though less well for smaller ones. So the health of the securities markets is a hugely important element in the recovery. So how far has the healing process gone?
I have just been looking at a speech on Tuesday by Paul Fisher, executive director for markets at the Bank of England, in which he charts the way in which the markets are moving into the recovery ward. As has been widely appreciated, the main equity markets have staged a reasonable recovery from the collapse of confidence in early 2009, as the top graph shows – though Japanese prices still are on the floor and there is still a long way to go before the rest of us reach the peaks of the last cycle.
Rather less appreciated, though, has been the contribution from the corporate bond market. The bottom graph shows the boom in the volume of so-called sub-investment grade debt last year and in the first part of this. The sub-investment grade market carries a certain smear, as these bonds are popularly known as junk, and I wish it didn't for two reasons.
First the distinction between investment grade and sub-investment grade is pretty arbitrary. A couple of years back Greek debt was ranked as investment grade, while the debt of many perfectly solvent companies was ranked as junk. And second, this distinction means that some investors are precluded from buying these securities when actually the yields compensate well for any risk involved.
Anyway, as you can see, last year was a clear record for the issuance of this sort of securities in the US and was ahead of previous peaks in Europe and the emerging economies too. A friend who helps run the finances of a sizable mining company found that some of the firm's bankers were being sniffy about rolling over their medium-term debts. They issued a billion or so of bonds instead and were astounded by the wall of money they were offered for these. At that particular end of the market the process of disintermediation – ugly word meaning not needing the intermediary of a bank between borrower and lender – is well under way.
However as Paul Fisher notes, "this recovery in markets has been neither uniform nor smooth". The sovereign bond market remains closed to Greece, Portugal and Ireland for obvious reasons. But other markets are closed too. For example there is no appetite for mortgage-backed securities, either here or in the US. If a bank in the UK wants to make a new mortgage it has to have the deposits against that mortgage. It cannot just grant the mortgage and sell it on to someone else. No wonder there is something of a famine in home loans. Mr Fisher notes that even if these markets come back they are likely to be much smaller than before and some markets, the ones at the centre of the banking crisis, may never come back at all.
Markets innovate, however, and if some of these old products never come back, there are ones being created. Many of these are fine. "Financial innovation should be seen as a 'good thing' in normal circumstances," says Mr Fisher. But of course the buyers have to be aware of the risks involved and when these are insured, the insurers too have to be able to track through the whole chain of risks involved. As for the regulators, they have to look through the sometimes opaque structures and frame appropriate requirements.
Standing back from the immediate concerns of the regulators, there are a string of big questions. From a macro-economic perspective, I think we have to accept that this expansion will be constrained by two things. One (and this goes far beyond the scope of this column) will be the shortage of energy and raw materials. The other will be the shortage of finance. Put crudely, if banks become less international in their operations, the burden on securities markets to become more international will be all the greater. If banks become smaller, at least in relative terms, securities markets will have to become larger.
The question I personally find most fascinating is whether we are in the early stages of a general move away from banks as intermediaries: to more of a 19th-century model for finance, when banks were national and relatively small and securities markets were global and huge. Of course the world is utterly different now. You cannot un-invent the model of international banking developed over the past half-century; not would you want to. But the huge reappraisal going on of where risk really lies when things go belly up will surely lead to yet more cautious banks. And if banks become more cautious, there are opportunities for other investors who think global – and are brave.