It’s a transformation that shouldn’t be under-estimated. It has forced banks to think long and hard about pretty much everything they do. On the primary side, that includes client targeting, client on-boarding and engagement, client relationship management and cross-sell as well as product and geographic value-add.
The all-things-to-all-people global investment bank is no more. What’s taking its place is a horses-for-courses environment where the starting point is that capital is a scarce and expensive commodity and how it gets allocated up and down the product suite is a fundamentally important question that is receiving more attention now than perhaps at any time in the industry’s recent past.
Earning a surplus over your cost of capital is a pretty basic business concept but given that’s not how the industry was managed before the crisis, it’s been a tough slog. And one that is leading – slowly – to banks exiting countries and regions; downsizing or cutting product capability; slimming headcount; making bankers more accountable including on a ROE basis; and exiting client relationships where they don’t or aren’t expected to make a return.
It’s a world where cultural transformation is also in full swing. What that means will be different for each institution, but it’s a notion that is being given major significance as the IB industry continues its quest to re-integrate itself as a positive force for the business world in the psyche of politicians, policymakers and wider society.
IFR convened an august group of senior market professionals to tackle the question of where IBD is headed. It’s true that the origination and advisory piece has remained under the direct radar of regulators, who have imposed a thick overlay of onerous systemic risk mitigators at group level – including governance and management controls; and capital, liquidity and leverage floors and buffers – but whose efforts below top level have been more focused on the trading and other businesses, some of which, of course, have been the subject of serial investigations into wrongdoing (FX, Libor, swap mis-selling etc).
Bearing in mind how much has evolved in the IB industry – the past two to three years have been a whirlwind of change – the fact that one of the speakers at the roundtable said there were far more changes ahead of the industry than behind it was a sobering thought.
Yet despite the challenges that remain, roundtable participants were broadly optimistic about the future. A lot of work remains but banks are fast learning the new art of operating leaner and meaner, with lower headcount, less capital and lower leverage. If nothing else, they have understood that the rules of the game have changed and are managing with increasing confidence to the future.
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