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Banks to Reduce Foreign Footprint, Bottom Lines


Politically driven retrenchment looks a lot like protectionism.

If you haven't already read John Mauldin's piece this morning on the challenges facing European banks, I encourage you to do so. In it, he discusses the fact that many European banks are far greater in size than their home country economies.

But to me, there's an even greater significance to his report: For most banks, their vast banking empires extend well beyond their local borders -- for some, the bulk of their assets (both good and bad) are abroad.

Bailing out banks because of their domestic missteps is one thing; asking local taxpayers to bail out a bank's foreign failings is another.

As a consequence, I expect that the long-term price paid by the "empire" banks (largely Swiss, British, Belgian, Dutch and German) will be a far, far smaller foreign footprint. (And, for what it's worth, the Swiss Central Bank has already created a 2-tiered capital requirement system: One level for domestic activities and another, higher, level for foreign business.)

But as necessary as these steps may feel to local politicians and central bankers, to the untrained eye, politically driven retrenchment looks a lot like protectionism.

To me, this is where it is going to get very interesting, particularly as governments pressure super-sized financial services firms to shrink. (And here I will digress once more to remind readers that, at the top of AIG's (AIG) divestiture plan, is none other than the firm's foreign operations. Or how about Bank of America's (BAC) sale of its investment in China Construction Bank? Or dare I suggest GM's sale of Opel, its European subsidiary? It will be interesting to watch other financial services firms -- from Citigroup (C) to Wells Fargo (WFC) -- to see if they follow suit.)

I don't pretend to know how this will fully play out. But at this point, the course is set. In an increasingly politically driven global financial system, the priorities are clear; and those priorities are being driven more and more by the voting booth.

And as any politician will tell you, local always wins.
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