Junior bankers need a new trick

IFR 2127 2 April to 8 April 2016
6 min read
Jonathan Rogers

All across Asia, older investment banking staff are facing the ravages of “juniorisation”. This involves the unceremonious dismissal of senior bankers, who are expensive and – unless they resort to cosmetic assistance – look less visually appealing and by neat inference less dynamic by the day.

Their replacements are much younger, cheaper (in the payroll stakes) and, dare I say it, more photogenic trading floor staffers.

I recently met up with a contact who had earned his chops at the Asian operations of a universal bank and now runs real money out of the region. We both laughed with schadenfreude and then agreed that the phenomenon was hardly new. Indeed, as dinosaurs we agreed that this had been the way for as long as we could remember, stretching back to the 1980s – although, with neither of us now sitting in the front office of big banking operations, we are perhaps in no position to imagine how brutal the process has become.

Getting on for a decade ago, the loan bankers at his former shop were content not to fully syndicate the lending business that had come their way, preferring instead to sit on the Libor plus carry they earned – principally through bridge financing – and in the process earn the handsome bonuses they were awarded and which naturally they thought through such lazy banking practice were their due.

He spoke of quasi-random sectoral division in the investment bank, with ultra-aggressive targets imposed on each newly created division. It all started to go wrong, he suggested, when the bank began to believe its own press.

It seems to me he was right to get out when he did. Not only is his fund a success as measured by its peer group, but it seems the knives may be beginning to fall as far as that loan book is concerned. Criminal charges have even been discussed.

THE CROSS-SELL, of course, has long had ponzi scheme toxicity attached to it. Investment banks with lending capability have always had their eye on the more glamorous land of the bond or M&A advisory mandate, and were all too frequently happy to lend out cash on the stipulation of winning more prestigious – or in some cases more lucrative – business, in that domain.

Classic disintermediation gets the paper off your books (assuming you price and execute properly and don’t end up sitting on a huge chunk of risk) and the capital markets community, rightly or wrongly, prizes league table standing on that side of the banking equation.

Well, rightly, of course, since any old dunderhead can lend out money, whereas convincing a few hundred investors to buy your bond proposal or earning your chops in advisory takes a little bit more grey matter. Or, indeed, the bare-faced dynamism which is the life blood or juniorisation.

The problem now is that many banks globally who practised the cross-sell are now sitting on ever more toxic loan books as a result. In the offshore lending world of Asia, the bad taste is worst in India, is rather bad in Malaysia, Thailand and Indonesia, and, for those global banks that got a slice of the pie, terribly bad in China. Revenge for what is now seen as reckless lending practice is yet to be taken.

The clearest precedent for the damage done by endemic toxic lending is Japan, which in reality has never managed to address the problem loans which are a legacy of the country’s 1980s credit boom.

China, wherein the banking system, both official and unofficial (the shadow banks) is estimated to be sitting on US$5trn-equivalent of bad debt, roughly half of the country’s gross domestic product, urgently needs to ring-fence the toxic assets and find a way of restructuring them.

ALL OF THIS points one way or another to an existential crisis in the practice of commercial and investment banking. You don’t need two dinosaurs sipping lattes in Singapore’s central business district and reminiscing about the good old days to tell you that. Dodd-Frank, the Volcker rule and Basel III have already done their work on that score.

The future is scaring the hell out of the industry, particularly among those who have escaped the scourge of juniorisation, whom my erstwhile friend referred to as the “cockroaches” – the old hands able to survive whatever dynamic forces may threaten their existence.

On the trading side, the fundamental review of the trading book (FRTB) reforms, recommended by the Basel committee on banking supervision to define clear lines between a bank’s trading and “ordinary” activities, are causing banks to rejig trading desks and to seek out countries where the environment might be the most benign.

It seems certain jurisdictions may be more willing to stomach banks’ trading models than others. Creative solutions to the FRTB are ongoing. Alongside this, I would hope that the cross-sell is being ditched in favour of more prudent practice. We won’t know quite yet, but I imagine the bond league tables will provide the evidence. Let’s just hope the juniors are up to the challenge.

Jonathan Rogers_ifraweb