Last updated: 20:04 / Thursday, 9 May 2013
The Economist Special Report

Wall Street is Back

  • Revenues in investment banking have shrank from US$350 billion in 2009 to US$250 billion last year, a massive drop that has more to it than the typical cyclical factors

Investment banking faces a leaner, humbler future, says Jonathan Rosenthal, in a Special Report about International Investment Banking published by The Economist, though a select few banks will emerge from the financial crisis even larger and more powerful.

The report posts that revenues in investment banking have shrank from US$350 billion in 2009 to US$250 billion last year, a massive drop that has more to it than the typical cyclical factors.

According to Rosenthal, new regulation, such as Basel III and derivatives regulation is to blame. Investment banking is becoming a less profitable business forcing several players to quit the market. The problem is that big banks post big systemic risks, and regulators would not approve mega mergers in the sector. In the recorded interview Rosenthal explains how European banks are facing stricter capital requirements and as they cannot sell their investment banking business to other players, they are simply being forced out of the business, as has happened with UBS that has decided to scale down dramatically its investment banking operations to concentrate in private banking and wealth management.

The Economist notes how, in 2008 just after the financial crisis exploded, European Banks thought that it was their opportunity to catch up with their American counterparts. For example, Barclays took advantage of Lehman Brothers failure buying its investment bank activities, but in the end, American regulators invested massively in the recapitalization of their banking system whereas European banks are still coping with this issue.  As a result, The Economist points out that without any doubt, “Wall Street is Back”.

This special report will be published in The Economist magazine on May 11th, 2013.

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