The third-quarter of the year was generally gloomy for banks, especially European banks, with a lot of them, such as HSBC, posting lower profits and some even slipping into the red, like Deutsche Bank. Major job cuts and restructurings are being launched across the board but the question remains whether all these efforts are sufficient to help large European lenders catch up with their rivals from across the Atlantic.
Better Late Than Never
Industry insiders seem to be in agreement that one of main factors at work behind European banks lagging behind US ones is that US banks started restructuring earlier, while a lot of European lenders are only now starting to work on it. Another factor is, of course, the heavy regulatory load that is being dumped on lenders in an attempt to make them more resilient against future market quakes.
Because of the increased liquidity and capital requirements imposed on banks, they are getting increasingly inflexible with regard to some of their core operations – fixed-income, foreign exchange, and commodities, also know as FICC operations. This is to a large extent what prompted the restructuring and streamlining drive.
No break from watchdogs
Banks will indeed have to become more flexible: the Financial Stability Board just came out with its final loss-absorbing requirements for the largest global lenders, and these requirements are serious. Adding insult to injury, the European parliament reached an accord regarding investment banking a couple of weeks ago that will see a Europe-wide ban on proprietary trading – the practice of a lender using its own assets for trading – and a set of penalties for banks that fail to disclose detailed information about their investment banking activities.
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FICC Revenues on the Decline
Truth be told, FICC as a source of income has been hit globally. Reuters cites data from Morgan Stanley showing that revenues from FICC in European and US banks for 2015 will come in at $82 billion, a $6-billion decline on 2014. The figure for 2016 is even worse, at $80 billion, mainly because of European banks. To compare, six years ago, FICC revenues across the world were $157 billion.
Layoffs and cost cuts were hoped to help
Other developments, such as a global shift towards trading automation, have been dampening profits in currency trading, for example, prompting lenders to prune their workforce in that department. In fact, most big European banks are embarking on across-the-board layoffs in order to cut their costs, with Barclays, for one, planning to shed 19,000 jobs, and Deutsche Bank eyeing 9,000 job cuts. Add to that major executive moves, such as Barclays taking on JP Morgan veteran Jess Staley, and you have a picture of financial institutions bent on surviving the tough times, hoping to regain any competitive edge they had against US banks.
Hesitant Recovery for Eurozone
Yet the eurozone economy is still in the doldrums, although it has been faring a little bit better after the European Central Bank (ECB) stimulus measures. The reason – emerging economies and their growth prospects are worsening, and inflation in the zone is continuing to be lower than desirable. The ECB, in the face of its Head Mario Draghi, seems determined to do whatever it takes to stimulate the economy – and the banking sector – but the success of its quantitative easing efforts remains uncertain against a global backdrop of slowing growth, most notably in China, and uneven recovery in the US.
So, what now for European banks? Leaner work forces, streamlined operation and the heavy breath of regulators down their necks,seem to sum up the situation well enough. The effectiveness of the new regulations seems unquestionable at first glance, but in practice a lot of voices from the banking industry are complaining that it is too complex. The ways in which the regulations will be implemented are unclear in parts, making this implementations slow and labored. As for the effectiveness of the cost-cutting measures – it’s all in the name of returns and only time will show whether the 4se measures are enough to make shareholders happy again.