12.31.2012
By Terry Flanagan

Banks Fear Worst is Yet to Come

As 2013 fast approaches, banks are being warned that things are likely to get a whole lot worse before there being any signs of improvement—despite the sector already enduring a series of banking bloodbaths in the year just gone.

In scenes eerily reminiscent of the final dark days of Lehman Brothers in September 2008, Citigroup earlier this month announced plans to axe 11,000 jobs in a bid to save just over $1 billion in expenses. This follows on from the 10,000 job cuts announced at UBS in late October, mainly from its fixed income division, as tough new regulatory capital rules appear on the horizon.

This all comes after new rounds of job cuts at many other banks this year including Deutsche Bank and Credit Suisse, while Barclays and Societe Generale are both shrinking their trading operations. Bankers at Investec have also taken cuts of around 15% to their basic salaries to ward off similar actions.

Jason Rolf, fund manager, Amati Global Investors

Jason Rolf, fund manager, Amati Global Investors

“In the main a lot of these jobs will be lost forever as they are probably structural,” Jason Rolf, a fund manager at Amati Global Investors, a U.K.-based investment manager, told Markets Media

“Higher capital requirements are driving the job cuts and bonus reductions and up to 10% of jobs could go in the next few years as banks will come under pressure from shareholders to cut costs, with a lot of cuts at senior level required.”

The impending Basel III bank capital rules, which are designed to harden the defenses of banks against a repeat of the global financial crisis, are meant to be phased in from January 1—although delays are likely to see this start pushed out to January 2014 now as only 11 of the G20 countries are in a position to implement the rules from the beginning of 2013.

Once in force, banks will be required to maintain proper leverage ratios and meet certain capital requirements. The rules, which governments around the world must start to implement once regulatory agreement has finally been reached, require all banks to strengthen their capital reserves, over a period of seven years, by eventually raising total core reserves to 7% from current levels of 2%.

Many of the job cuts already witnessed at the major banks in 2012 have been to do with being able to operate in a post-Basel III environment, while an alphabet soup of other regulations across the globe, including Dodd-Frank, MiFID II and Emir, that are set to descend on capital markets in the coming months and years, are all likely to ramp up costs still further for banks as regulators look to reduce risk and increase transparency following the financial crisis.

“Some banks may stop operating globally to achieve sufficient cost-cutting,” said Rolf at Amati Global Investors. “Pushing markets from pure OTC to centrally-cleared [as will be the case under Dodd-Frank and Emir] is the first step, then maybe we will see more transparency on prices as products are traded electronically, but ultimately this requires less people.”

PJ Di Giammarino, chief executive of JWG, a regulatory analyst, added: “The next five years will be the most challenging the financial sector has ever faced, with regulations that introduce fundamentally new, deep, complex and sometimes overlapping requirements to an already huge rulebook.

“Interpreting the rapidly changing regulation currently being planned is one thing, but understanding how this will then interact with existing regulations and planning for future regulatory demands is another. Financial institutions will need to contribute to setting gold standards across jurisdictions, or they run the risk of operating with no single view of ‘what good looks like’.”

Multinational banks may even need to develop policies that vary from region to region as different jurisdictions interpret the avalanche of new rules slightly differently so their local markets can still operate, requiring each bank to develop robust and flexible IT systems capable of adaptation at short notice. Failure to adhere to these regulations will likely lead to dire consequences, including criminal charges.

While banks, who are generally behind the social media curve anyway, are also being warned that they face even more pressures in this field as customers and clients alike want to see more interaction with banks on social media sites such as Facebook, LinkedIn and Twitter, as well as through mobile devices.

This caution by banks is brought on in part due to the financial services sector being heavily regulated already—with banks having to tread carefully in this field as an errant Tweet can negatively affect a trade or a client relationship.

“Banks are set to have some of the toughest years ahead of them we have seen in decades,” said Daniel Mayo, practice leader, financial service technology, at Ovum, a consultancy.

“Business pressures such as consumer demand for greater interaction via mobile devices or social media platforms are coming in to conflict with greater reporting and transparency demanded by regulators.

“There remains great uncertainty in the industry about how to tackle these issues, with many banks specialising themselves in order to retain profits and reduce exposure to regulatory risks.”

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