Winners and Losers in Investment Banking
Now does not seem a good time to be in investment banking. Employee bonuses look to be significantly down, share awards are underwater, and continued job cuts look inevitable. For shareholders, demand for many products and services has plummeted, moves to exchanges and central clearers will be expensive and result in lower returns, and regulation is dramatically increasing costs and transforming business models.
But it is not all doom and gloom. The Euro crisis seems to be nearing its final act. Whatever the result, including disorderly break up, once the smoke clears there will be a huge need for refinancing and restructuring of European economies. Banks with the right businesses, resources and operations at that time should have plenty of opportunities.
Preparing for the future
What will distinguish the winners from the losers is the progress each investment bank makes in adapting to the seismic changes occurring in the industry. Some of the key areas where gaps in the degree of progress are opening up are:
- Reshaping of business model – Clear understanding of post capital, tax and liquidity returns under new rules, in the new market environment, and whether these are businesses that should be developed, mothballed or exited.
- Legal entity strategy & structuring – Having an integrated view of all the new and anticipated legislation (e.g. MiFID, ICB, RRP), and how you need to reshape your structure in response, including the entire booking model.
- Governance & decision making – There are significant new requirements (e.g. the European Banking Authority’s Guidelines on Internal Governance). Continued failures in this area show the industry is still a long way from where regulators and shareholders want it to be.
- Derivative market change – A number of clients are working out what role they want to play in the derivatives market. There are many ways to approach this, but a clear strategy is essential.
- Operating model – Having a plan to build an industrialised, low cost operating model that can also meet your regulatory and risk management needs.
- Liquidity & capital planning – Optimisation of these scarce resources, including by appropriate internal pricing. Need to prepare for the new rules.
- Remediation – As the tide continues to flow out, more issues over product presentation, rogue trader and balance sheet issues are likely to surface. Firms need to be prepared.
- Regulatory reporting and data – To get this right, and cost effective, requires significant and sustained investment, which runs contrary to immediate need to improve quarterly results.
The firms that successfully address all these issues are likely to be in a minority and have a clear competitive advantage.
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