Investment Banking Employment Trends – First Half 2012

The recession was tough on a number of professions, and the investment banking industry was no different, seeing a year over year employment growth rate trough of over 7 percent in the summer of 2009.  But, how has the recovery treated investment banking professionals?  In short, not so well.

The industry did see some growth in the first part of the economic recovery, growing by over five percent in the third quarter of 2010, but has since seen declines in overall employment growth, with overall employment declining by around 11,000 jobs from the growth rate peak to the second quarter of 2012.  The industry as a whole is now entering its seventh quarter of jobs losses, with the most recent quarter posting a year over year decline in employment of around 6.2 percent.

What’s causing the decline in the employment in the industry?  The answer largely comes down to one word: regulation.

Regulation Stifling Growth

With the United States planning on implementing the new Basel III regulations, investment banking firms are largely under pressure to keep current profits decent while complying with a total of around 57 new regulatory burdens (http://www.efinancialnews.com/story/2012-05-21/bank-rules-will-cause-economic-winter).  What is it about the regulations that’s causing employment problems in the investment banking industry?  There is the general requirement, accomplished through higher capital requirements, among other things, to take less risk, and as any professional economist will tell you, the less risk the economy takes, the slower the growth rate is (or, in this case, the larger the job loss is in the financial industry) (http://www.economist.com/topics/investment-banking).  In addition to the regulatory burdens, the investment banking industry is also under pressure because of decreased trading volume on the equity exchanges.

How is the industry doing compared to the rest of the financial industry and the economy as a whole?  The answer is: not very stellar.

While the economy continues to add jobs at about a one and a half percent rate, and the hedge fund industry is adding jobs at close to a four percentage point rate, the investment banking industry is declining at around 5 percentage points at an annual rate.

What does all this portend for the future of employment in the investment banking industry?  The answer to this question largely depends upon how quickly individuals’ appetite for risk recovers and how stringent the regulatory burden turns out to be.

Risk appetite on a day to day basis is a fleeting thing, but on a longer term basis, if investors don’t regain their desire for higher yielding risk assets, the investment banking industry will continue to be under pressure (https://research.standardchartered.com/researchdocuments/Pages/ResearchArticle.aspx?&R=97055).  Of course, as soon as sustainable appetites for risk gain stream, the industry likely won’t hesitate to add to its payroll.

The political institutions could help out on the regulatory burden issue by eliminating growth stunting reporting and management burdens.

Whether this will happen is anyone’s guess.

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