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The Deal: Post-Lehman Wall Street Remains Gun-Shy

Alas, the so-called shadow banking system these funds and other alternate credit-providers comprise is expected to grow in the aftermath of Lehman, as tighter credit criteria from banks leaves a larger pool of consumers unable to access credit.

Royal Bank of Canada (RBC) co-heads of the financial institutions group, Jerry Wiant and Henry Michaels, believe a back-to-the-future scenario has seen banks reassess their priorities.

"Banks have been pushed into more client-facing fee-generating businesses as opposed to high-risk activities where they are putting the bank's capital at risk, such as energy trading," Wiant said.

Michaels pointed to greater investment in commercial rather than retail banking given tighter regulation around the latter.

Little wonder then why Morgan Stanley has embraced retail brokerage with its completed acquisition of Citigroup's former Smith Barney business ¿ a far cry from its ballooning trading businesses that once laid bets on risky mortgage securities. Commodities operations that were once lucrative are also being scaled back or put on the selling block by Morgan Stanley, Goldman Sachs & Co. and JPMorgan amid greater regulatory oversight.

Large banks still value retail customers for the valuable deposits they provide, Wiant said, but these institutions are being more selective.

"It doesn't pay to focus on the marginal consumer or credit, so banks are moving up to the high net worth customer base," he explained, adding that there is less risk of provoking consumer protection issues when dealing with sophisticated investors.

Both Citigroup and BofA have exited various retail portfolios worldwide, namely credit card businesses. BofA has instead chosen to focus on retail banking within the U.S. while moving to become a global corporate and commercial bank after its acquisition of Merrill Lynch. It has also changed it emphasis in retail banking, having put dozens of branches up for sale as it reduces its network to around 5,000 from 5,300 by the end of 2014. BofA management is now listening to customers' financial advice needs rather than pushing products ¿ perhaps a response to lingering memories of being dogged by foreclosure scandals.

Banks even extend the duration and quality of their funding after the freeze in markets caught many short.

"Without a doubt, the financial industry has become better capitalized and more liquid," Standard & Poor's analyst Rodrigo Quintanilla told clients in a Tuesday, Sept. 17, report. "Asset quality has improved and balance sheet repair is nearly completed."
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