The investment banking industry is notoriously cyclical; with abundant opportunities and bonuses in good times and layoffs during weaker economic conditions. However, the recent volatility in capital markets around the world has caused these business cycles to dramatically shorten, making employment security a threatened concept amongst investment bankers.
Market Fluctuation Slows Growth
In the first quarter of 2012, investment banks in the United States saw a strong increase in investment banking revenues. Along with this, investment bankers saw their bonus opportunities increase and there was increased hiring at a number of firms. Unfortunately, however, this optimism seems to be short lived with growing instability in Europe contributing to a challenging second quarter for investment banking revenues.
In a June 11th Bloomberg article, Wall Street reporter Michael J. Moore indicated that a number of investment bankers were concerned that the second quarter would be far less positive for the investment banking community. The number of deals in the pipeline has declined dramatically as equity and debt markets have both retracted from highs earlier in the year. Firms are reluctant to enter into financing transactions at potential market lows, so investment banks have seen a number of deals withdrawn from the market. In a note issued at the beginning of June, Goldman Sachs analyst Richard Ramsden indicated that for a third straight year, U.S. firms may experience a 30 percent decline in their investment banking and trading revenues in comparison to the first quarter. This kind of decline will have a real impact on the investment banking industry.
The Impact of Increased Regulation
In addition to unstable capital markets, the impact of increased regulation on the industry is still being felt for many firms. New rules, implemented after the 2008 and 2009 financial crisis, have made it more difficult for firms to participate in certain transactions and trading activities and have increased the cost of compliance internally at the firms. These additional costs and the reality of fewer available opportunities have also negatively impacted most firms within the industry.
This ongoing trend of fluctuating revenues, unstable market conditions and an unfavourable regulatory climate is making it difficult for firms to commit long term to adding new analysts to their teams. Opportunities are generally limited to contract type deals for those with specific expertise related to currently ongoing deals and projects. This will likely remain the status quo in the industry until a robust economic recovery occurs around the world.