BANKS are yet again in trouble—not pure investment banks such as Lehman Brothers, or mortgage specialists such as Northern Rock; but a handful of huge global “network” banks. These lumbering giants are the woolly mammoths of finance, and if they cannot improve their performance they deserve a similarly grievous fate.

The pressure is intense. Last month JPMorgan Chase felt obliged to tell investors why it should not be broken up. Citigroup awaits the results of its annual exam from the Federal Reserve: if it fails, as it did last year, its managers will be for the chop. Deutsche Bank is rethinking its strategy, after years of feeble performance and drift. HSBC, the world’s local bank, has been hammered for both a tax scandal in its Swiss operation and because of its poor profits.

A shining Citi on a hill
On paper global banks make sense. They provide the plumbing that allows multinationals to move cash, manage risk and finance trade around the world. Since the modern era of globalisation began in the mid-1990s, many banks have found the idea of spanning the world deeply alluring.

In practice, however, they have been a nightmare to run. Their sprawl remains vast. Citi is in 101 countries, employs 241,000 people and has over 10,000 properties. Talk of global best practice is hollow, given the misdemeanours that banks have been accused of facilitating, including money-laundering in Mexico (HSBC and Citigroup) and breaking sanctions (Standard Chartered and BNP Paribas). No boss but Jamie Dimon of JPMorgan Chase gives a convincing impression of being in full control—and even he suffered a $6 billion trading loss in 2012. Some, like Royal Bank of Scotland (RBS), having decided that they have suffered enough, have sounded a full-scale retreat and pledged to concentrate on their home markets. Others, like Citi and HSBC, are slimming down and shrinking their global presence.

The wave of regulation since the financial crisis is partly to blame. Regulators rightly decided not to break up global banks after the financial crisis in 2007-08 even though Citi and RBS needed a full-scale bail-out. Break-ups would have greatly multiplied the number of too-big-to-fail banks to keep an eye on. Instead, therefore, supervisors regulated them more tightly—together JPMorgan Chase, Citi, Deutsche and HSBC carry 92% more capital than they did in 2007. Global banks will probably end up having to carry about a third more capital than their domestic-only peers because, if they fail, the fallout would be so great. National regulators want banks’ local operations to be ring-fenced, undoing efficiency gains. The cost of sticking to all the new rules is vast. HSBC spent $2.4 billion on compliance in 2014, up by about half compared with a year earlier. A discussion of capital requirements in Citi’s latest regulatory filing takes up 17 riveting pages.

Partly as a result, global banks are now flunking a different test: that of shareholder value.

Most of these titans struggle to make returns on equity better than (much safer) electrical utilities. Last year Citi’s was a dismal 3.4%. JPMorgan Chase estimates that its scale adds $6 billion-7 billion a year to its profits. Yet the costs of the additional capital it must carry, and of the extra rules and complexity that being global entails, offset a big chunk of that. (No other firm makes estimates this explicit, presumably because the figures would not flatter.) Up to half the capital invested in the big global banks failed to make a return on equity of 10% or more last year.

Investors are asking if the costs of their global spread outweigh the benefits. If the likes of Citi and HSBC don’t buck up soon, they will be dismembered—not by regulators, but by their shareholders.

Global banks insist they have a competitive advantage. No one else can do what they do. A mesh of alliances between hundreds of local banks would be rickety and hard to police; Silicon Valley has yet to invent a virtual international bank; and emerging-market contenders such as Bank of China are a decade away from having global footprints. But genuinely global activities, such as foreign-exchange trading and providing cross-border banking services to multinationals, typically account for only a quarter of big banks’ revenues.

It is hard to avoid the conclusion that global banks are, by the standards of normal firms, dysfunctional conglomerates that struggle to allocate their resources well. Their bosses must now try to forge lean firms that facilitate global trade at low cost and risk. If clients find these services valuable, the banks will be able to charge enough to offset their huge overheads, and make a decent return for their shareholders on top. If clients do not, the global bank deserves to become just another of finance’s failed ideas.