We are in the midst of yet another culling season within various banks’ Markets divisions, with this round’s poster children appearing to be Societe Generale and Nomura thanks to heavy cuts across the FICC business. Staff comings and goings are a routine part of banking life of course, but I wonder if this is the last gasp attempt on the part of these banks to maintain some sort of Markets business before they finally wave the white flag?
SocGen in particular seems very fond of a “realignment” or “reorganisation” or repositioning” of its markets business – it has used all three terms at times over the past decade or so – and the latest cuts are the result of an underperforming trading business. That should not come as a surprise given how low volatility is, but I also think it is a result of the competition just getting too intense.
This is not just about the bigger banks either, it is also about how the top end non-bank trading firms are beating middle-tier banks to what was valuable business – I think, quite simply, the heat in the kitchen has been ratcheted up too high.
The Nomura cuts may be a little different, not least because they seem to be exclusively targeted at the traditional voice businesses – sources at the bank have assured me they have development budgets for this year and next and that they are exclusively orientated towards the e-business.
Looking at the broader middle tier banks in financial markets – and I think this is a story we will hear more and more – it is hard to see institutions being able to make enough of an impact going forward to survive comfortably unless they can build a robust and scalable technology framework and have a strong calling card.
It’s really a question of differentiators – that word so many people are fond of using when describing their value proposition. Putting aside the obvious marketing spin often involved, where exactly can a middle tier bank differentiate themselves these days? In the past it was all about their people, this was the hook upon which they hung their differentiator hat, but can we really be expected to swallow that when so many of these people have been let go?
Elsewhere we have, of course, technology, but are these banks going to be willing to spend the considerable amounts involved to compete at the level required? I can see a senior executive signing off for one or two years’ budget thanks to an excellent powerpoint and over-optimistic projections, but after that? After that I can only see them thinking collaboration – cut the tech budget, cut the staff, give the business to a third-party firm that can handle it for a fixed fee.
Another area of potential differentiation in FICC markets is risk warehousing, but does anyone really do this anymore? The more traditional method of warehousing risk with a human is actually probably cheaper given the bill for data and technology required to adequately manage short term risk (seconds and minutes). If a human manages it, the view is probably longer term, as in minutes and possibly hours.
I struggle to see how a bank that has laid off a lot of staff; is struggling with its trading revenue targets; and has a limited technology budget is going to find a way to stay relevant. They are inevitably going to outsource some or all of the risk function to a third-party, be it a global giant, a non-bank market maker or even a hedge fund.
I should stress that I actually think this rather gloomy outlook is limited to a relatively small sector of the market, particularly those banks with global ambitions or highly competitive domestic markets like Europe. It is faintly ironic that the creation of the euro has meant that a large number of banks that support the functioning of that currency also have no IP when it comes to global markets. In the past a French bank would have a strong base in France – now it’s just one of dozens of European banks relying upon local loyalties in a political system designed to break those loyalties down.
Look at the US. There were dozens of banks trading in international markets 20 years ago but that has largely been whittled down to two giants, two investment banks and a couple of custody houses. The rest have either been swallowed up or become a customer of one of the bigger players. The same has to happen in the Eurozone – the only real question is which names will make up the “big two”?
There is still value in smaller regional banks having a local markets presence, because not least, they know the clients on the ground really well – they have to, it’s a limited client base. These banks get into those client segments that are simply too much trouble for the global players and while they will be clients of those global banks, they still have their own IP.
These players absolutely need to embrace modern technology, but they don’t need to spend as big as a middle tier bank. They also need to maintain their ability to hold risk in their domestic currency – again, it’s one thing to say I’ll be a risk warehouse in EUR but quite another to do it in, for example, NOK or ZAR.
So while I suspect we are on the cusp of a series of headlines about banks cutting staff numbers, I suspect they will be focused on a relatively small part of the banking ladder in markets terms. If you sit at the top you are in an arms race but often have the budget and resources to stay relevant; in the bottom tier you fulfil a vital link between certain local markets and the global stage.
The problem is the bit in the middle. These players are being squeezed from all sides and I suspect that their answer will be to concede defeat and outsource their business. The really big question I suppose, is what would the removal of this tier mean for market liquidity and functioning?