“It’s a once-in-a-lifetime shift,” says Vikram Pandit, who, as CEO of Citigroup from 2007 to 2012, led the definitive global financial supermarket. “The architecture in banking is evolving from conglomerates into smaller, nimbler, specialized providers. This isn’t just technological, it’s a shift in business models.”
For all the efforts to rein in the financial industry since 2008, it does have a record of shaking off disasters, from the U.S. savings and loan crisis of the 1980s to the dotcom bust of 2001. Scandals have engulfed the biggest investment banks in recent years, from subprime mortgages to the rigging of the foreign-exchange market to helping wealthy clients sidestep taxes. But Wall Street almost always finds a way to adapt to new rules, bewitch investors with new products and bolster its bottom line.
“This is a sector that has periods of calm, but we shouldn’t assume that surges of recklessness and outright fraud have been wiped away,” says Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, a panel appointed by Congress in 2009. “There is always a clear and present danger of that type of behavior returning.”
This clampdown doesn’t look like it will end anytime soon. Instead, the industry is changing at a structural level. Not a month passes without a bank or broker-dealer announcing another business shutdown or market retreat. Credit Suisse Group AG and Deutsche Bank AG recently hit the reset button on top-to-bottom reorganizations, and Barclays Plc announced in March that it was withdrawing from an entire continent, Africa, after 91 years. Even Goldman Sachs Group Inc., which has watched its shares drop 23 percent in the past 12 months, has been humbled. In April, it started offering consumers online savings accounts. The price of admission: $1.
Brexit compounds the pressure on financial firms by casting London’s future as an international financial capital into doubt. Even as British banks weigh plans to offshore operations such as clearing to Continental Europe, investors have found another reason to bail from their stocks. Barclays and Royal Bank of Scotland Group Plc have each lost about a fifth of their value since June 23. The vote prompted the government to push back by two years the sale of its 72 percent stake in RBS, which was nationalized in 2008 to save it from insolvency. Likewise, British taxpayers will have to wait on the sale of their 9 percent stake in Lloyds Banking Group Plc., which has lost about a quarter of its market value since the referendum.
No precinct in the industry is being whipsawed more than fixed income. While stock trading went electronic long ago and now moves at light speed, the $8.4 trillion U.S. corporate bond market is relatively unchanged since Michael Lewis played Liar’s Poker with his pals at Salomon Brothers in the 1980s. The corporate debt game is still dominated by big broker-dealers, and 80 percent of trades are still executed by phone, according to Greenwich Associates.
But the one-two punch of regulation and technology is softening up this bastion of 20th century finance. The 2010 Dodd-Frank Act in the U.S. and new global capital requirements have forced banks to cease borrowing at 30 to 50 times their capital to make proprietary bets in the markets and juice bonuses. The Federal Reserve and its counterparts in Europe stress test lenders every year.
Meeting the capital requirements has made it less profitable for banks to play their time-honored role as middlemen in fixed income. Last year, companies issued $1.5 trillion in debt, double what they sold in 2008. Yet primary dealers have decreased inventories of bonds to help buyers and sellers trade, according to the Federal Reserve Bank of New York.
As a result, there’s less action on trading floors. Profit from dealing fixed income, currencies and commodities, or FICC in industry parlance, has dropped 56 percent globally since 2012, to $26 billion, according to Boston Consulting Group. One out of three bond traders have been fired in the past five years, says research firm Coalition Development. This harsh reality is turning an eat-what-you-kill culture that prized risk-taking into one that’s guarded and paranoid.
“Today it’s play it safe, play it conservatively, don’t rock the boat,” says Heather Hammond, co-head of the global banking and markets practice at executive search firm Russell Reynolds Associates.