A couple of weeks ago, the Financial Times published several stark analyses of the shifting balance of power in global investment banking. It revealed that while eight years ago half a dozen banks generated the bulk of their business in investment banking, today only a couple (Goldman Sachs and Morgan Stanley) still do.
The biggest retrenchments have been European. The shrinkage at Royal Bank of Scotland and UBS has already been dramatic. Barclays has begun to pull back from some regions and products, while Credit Suisse and Deutsche Bank, both of which have new plain speaking chief executives, look set to follow suit.
This, of course, is what regulators and national governments wanted. The financial crisis highlighted both the danger and taxpayer cost of banks being bigger than their host countries, as they were in Switzerland and the UK. New rules and tough talk from politicians have understandably deterred European banks from investment banking. US rivals now command double the market share.
It is fashionable to see this shift as a positive. But the next round of regulations could undermine the banks to such an extent that it risks undermining their corporate customers as well as Europe’s broader economy.
Nowhere is that truer than in the UK, where the likes of Barclays and HSBC face more than three years of structural overhaul to comply with incoming rules on ringfencing — the circuit-breakers that will be inserted between high-street banking and investment banking operations.
Quite how much of a headache it will cause will not be clear until the Prudential Regulation Authority publishes final rules on the topic next month. Will capital be transferable across the ringfence via dividends or other means? Will funding lines between the two be capped as with any counterparty? How high will capital strength ratios have to be for both ringfenced and non-ringfenced entities?
Banks are hoping that the government’s softening position on the City more generally will convince the regulator to be generous in its interpretation of the rules.
A lot is hanging on the decision. If the PRA takes a hard line, banks might have to find fresh capital. And raising finance in the bond markets, crucial for the investment banks trapped in non-ringfenced entities, could become more expensive. (Without recourse to the diversification of earnings or deposits on the other side of the new barrier, the non-ringfenced bit of a big bank is riskier.)
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