Posted on 09 Sep 2009
A JPMorgan study indicates that the global regulatory crackdown in the wake of the financial crisis is likely to cut long-term profitability at US and European investment banks by nearly a third, forcing them to cut bonuses and shed staff.
The report, a copy of which has been seen by the Financial Times, takes a deeply pessimistic view of the impact of regulatory changes that include tougher capital rules for trading and a push to trade derivatives on exchanges.
It calculates that investment banks’ return on equity will fall from 15 per cent to just under 11 per cent in 2011.
JPMorgan says the drop in profitability is likely to lead to lower pay and bonuses at the investment banks.
Its report forecasts that banks will be unwilling to operate at reduced profitability levels and will respond with massive restructuring, including further headcount reductions in some areas and swingeing cuts in compensation across the board.
By contrast, banks that focus on traditional lending are likely to be less affected by much of the regulatory clampdown, the report says.
Kian Abouhossein, JPMorgan banking analyst, says: “Traditional credit will be a better place to be than investment banking”.
Other industry analysts and regulators have also forecast that higher capital requirements for higher-risk activities will lead to lower profits and smaller bonuses.
The report’s findings are likely to be well received by politicians and regulators around the world who have been fighting hard for policy changes to rein in investment banks and to encourage ordinary lending.
“The abatement of financial tensions has led some financial institutions to imagine they can return to the same modes of action prevalent before the crisis. This is not an option,” the leaders of the UK, France and Germany wrote last week in a letter outlining their goals for the G20 summit of world leaders in Pittsburgh later this month.
The report focuses mainly on proposals that have strong support in the US and does not include the higher overall capital requirements that were discussed by G20 finance ministers at the weekend.
The investment banking divisions of Deutsche Bank and French banks Société Générale and BNP Paribas will be hit hardest by the changes, the report says, but Morgan Stanley and Goldman Sachs will feel the most impact.