Market view | Investment banking Game changer Lynn Strongin Dodds explains why banks can’t turn back the clock.
Hope may spring eternal but any chance of investment banks returning to their modus operandi has been dashed by the ongoing eurozone crisis, the prolonged economic downturn in the West and a cascade of regulation. As a result many believe that the industry is undergoing a once in a generation change and that the model will have to be dramatically reconfigured. “With the demise of volumes across plain vanilla and cash products – in some cases more than 40% – and the retreat from structures and complex risky instruments due to intense regulatory scrutiny and new legislation, investment banks are under exceeding pressure to reinvent themselves,” says Maurizio Bradlaw, a Frankfurt based partner at Capco, a global business and technology consultancy. “The key challenge is that for many, investment banking was the main bread winner for the organisation. “
This position is now under severe threat and they have to come to terms with the fact that both the historical returns and growth in this sector are gone. It will be sometime – potentially even questionable – if they will ever return, at least in the traditional sense of an investment bank’s trading function. Job losses are typically the first line of defence and the axe has fallen widely for junior as well as senior positions. The figures make for sober reading on both sides of the Atlantic. Wall Street banks laid off over 75,000 people in 2011 and analysts estimate that overall they will have roughly 10% to 15% fewer employees in early 2013 than they did at the start of 2012. Europe has been equally impacted with the City of London taking the brunt. When the dust settles this year, the number
Best Execution | Autumn 2012
of jobs is likely to stand at around 255,000, a level last seen in 1996.
Equities has been one of the worst affected
areas with a recent study by Greenwich Associates – European Equities Investors – showing that banks are in a phased retreat or retrenchment. For example, Nomura recently announced that it was realigning its equities trading business, opting to consolidate execution services under its Instinet agency brokerage brand while Italy’s Unicredit has withdrawn from Western sales and trading, handing French broker Kepler Markets the right to service its clients. Moreover, Credit Agricole is in talks to sell Cheuvreux to Kepler while retaining a strategic stake. In the UK, state-owned Royal Bank of Scotland decided to refocus its attention on fixed income and withdraw altogether from most of its equities business. Even the behemoths are making adjustments with firms such as Deutsche Bank, Citi and Credit Suisse integrating their equity trading services
“With the demise of volumes across plain vanilla and cash products – in some cases more than 40% – and the retreat from structures
and complex risky instruments due to intense regulatory scrutiny and new legislation, investment banks are under exceeding pressure to reinvent themselves.” Maurizio Bradlaw, Capco
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