Future of Investment Banking
The Future of Investment Banking
The era of investment-banking (IB) post-economic crisis of 2008 will see increasingly modest returns and a much meeker future. Returns on equity (ROE), a standard measure of profitability, once routinely ranged from 20-25%, have now halved to 13% and will continue to plummet to 6-9% by 2017 with the incorporation of new regulations. These regulations will fundamentally change the face of IB. Higher capital standards will force banks to shrink their balance sheets—making many of their businesses far less profitable. These new requirements, known as the Basel III regulations, will strengthen bank capital requirements by increasing bank liquidity and bank leverage. Banks will now be required to have equity buffers 3 times as large as previous standards by 2019. Proposed regulations will make IBs easier to break up, and banks will be less able to use cheap retail deposits to fund their trading business and take risks. The Volcker rule in America proposes to stop banks trading for their own profits. This regulation will outlaw a range of activities that accounted for a good chunk of American investment banks' profits and will force banks to standardize many of the derivatives they offer and to push them onto clearing houses (cutting deeply into FICC revenues). In addition, proposed regulations could force big foreign banks operating in America to establish local holding companies for all their American subsidiaries. If other regulators follow this lead and force all foreign banks to hold capital and liquidity locally, the era of financial globalization would be over. European regulations propose to separate investment banking from retail banking so that retail deposits cannot be used to finance investment-banking business.
Thanks to new technologies, such as algorithmic trading systems, many of the jobs formerly done by bankers are now being carried out by computers. Algorithmic trading and high-frequency trading that came about 6
The era of investment-banking (IB) post-economic crisis of 2008 will see increasingly modest returns and a much meeker future. Returns on equity (ROE), a standard measure of profitability, once routinely ranged from 20-25%, have now halved to 13% and will continue to plummet to 6-9% by 2017 with the incorporation of new regulations. These regulations will fundamentally change the face of IB. Higher capital standards will force banks to shrink their balance sheets—making many of their businesses far less profitable. These new requirements, known as the Basel III regulations, will strengthen bank capital requirements by increasing bank liquidity and bank leverage. Banks will now be required to have equity buffers 3 times as large as previous standards by 2019. Proposed regulations will make IBs easier to break up, and banks will be less able to use cheap retail deposits to fund their trading business and take risks. The Volcker rule in America proposes to stop banks trading for their own profits. This regulation will outlaw a range of activities that accounted for a good chunk of American investment banks' profits and will force banks to standardize many of the derivatives they offer and to push them onto clearing houses (cutting deeply into FICC revenues). In addition, proposed regulations could force big foreign banks operating in America to establish local holding companies for all their American subsidiaries. If other regulators follow this lead and force all foreign banks to hold capital and liquidity locally, the era of financial globalization would be over. European regulations propose to separate investment banking from retail banking so that retail deposits cannot be used to finance investment-banking business.
Thanks to new technologies, such as algorithmic trading systems, many of the jobs formerly done by bankers are now being carried out by computers. Algorithmic trading and high-frequency trading that came about 6