Without coming out and declaring it, news commentary over the last several months has been marking the death of the top tier investment bank. This is not to say that they’re all about to fold but that their defining characteristics are being reset. Historically, what has marked out the tier ones (setting aside discussion of the “universal bank” paradigm) has been:
- They’re global, not just in distribution but as brands. In contrast to the smaller banks, top tier firms have transcended the borders of their country of origin. An archetypal illustration of this was when Union Bank of Switzerland renamed itself simply UBS (which it announced, ironically, following the acquisition of Swiss Bank Corp). With the benefit of hindsight, jettisoning their Swiss identity, with its connotations of prudential management, may have been hubristically unwise but it caught the spirit of the times. Now, across the sector, the “global” sheen is thinning (if only under the intensity of regulatory glare) and the national identities of the largest banks are increasingly visible again.
- They can sell/structure any product. This proposition is rapidly collapsing under a regulatory drive towards standardised markets. This regulation is often simply driving a proper accounting treatment for the cost of risk and capital in each business line. Whether by legal fiat or through economics, many exotic and structured products, along with a number of relatively vanilla ones, are now no longer viable.
- They are in the flow. This implies a topography of knowledge different from a level playing field – and that’s increasingly becoming illegal.
- They lead with great research. Historically, top tier bank research has been viewed as a driver for trading. Arguably, the value of this evaporates as soon as you start to measure it, which has been the background concern in discussions around “unbundling” for over a decade. As industry margins get tighter and cost/value scrutiny intensifies, the number of banks offering comprehensive cross-sector/cross-asset research must inevitably decrease.
- They have the smartest people. My column on electronic market-making exampled some specific areas in which advanced mathematical know-how could give a bank a true edge. However, the three points above reflect a distrust in services that depend upon a bank knowing more than its clients do: rocket-sciencery isn’t what it was.
- They build their own IT and back office in order to be able to deliver any solution. We set up eCo because we believe this game is over. Few of the optimists in banking have a detailed vision of what IT will become when the next bull market arrives. No one seriously believes that it can return to what it has been and we’re here to offer an enabling alternative.
The impact of all of this has been nicely analysed by William Wright, who charts the decline in FICC across the street and correlates it to the erosion of overall investment banking profitability.
In my own experience, I’ve seen traders exit from investment banks – often moving to non-bank financial institutions – leaving once-lively desks moribund in areas ranging across prop, exotics, lending, market-making and voice trading. While the shrinkage of IT and the back office is continually discussed but not actually achieved, this dramatic actual shrinkage in the front office has paradoxically only been remarked upon when the curtailed activity remains within the same firm – albeit within the virtual perimeter of a huge “bad bank” ghetto.
Beyond observing that they are no longer what they were, I have nothing to add to the debate regarding the prognosis for top tier banks. It feels like the moment in the Seventies when rock stars in platform heels, make-up and glitter suddenly became ridiculous. Then there was punk. What is the fintech revolution if not polite punk for the finance sector? Why else, for the last couple of years, has the adjective “disruptive” become mandatory (excuse me while I yawn)? It’s the new wave, throbbing out of London like SEX and Joe Strummer. Less than a quarter of those photographed in Financial News’s inaugural fintech power list are wearing a tie (and half of those who are sporting one are from the blue chip rump): as I noted in the last column, now we’re turning to the renegades.
Ties mean very little, of course, but this hints at what the workforce must become: more nimble, more empowered, less rigid, more professional, smaller, less well-paid and happier.