Investment Banking Industry Targeted by New Regulations

After a prolonged series of negotiations, consultations and political lobbying, the European Central Bank released its fact finding document on January 28, addressing the future of banking in Europe. At the heart of the discussions were concerns about the risk investment banking activities posed to the less risky deposit taking operations of large integrated banks. While many politicians lobbied for rules requiring a complete split between investment banking and traditional banking operations, the ECB rejected these demands in favor of a more balanced approach. The results of the ECB report are important as it will begin to assert regulatory authority over Europe’s largest financial institutions beginning next year.

While the report may seem like a victory for the investment banking industry on the surface, significant reform is still expected, and will come at a heavy cost to Europe’s largest banks. Limitations on risk taking are widely expected to be part of a longer term solution and additional oversight and regulatory burden is almost assured.

Liikanen Proposal Still Hangs over Industry

The report of an EU advisory panel, named after the group’s leader Erkki Liikanen, still hangs over the European financial industry as further reforms are considered. The authors of the report proposed a complete split of investment banking and proprietary trading activities from deposit taking functions at all European banks.

The ECB report did not do much in addressing the fears of the industry, with comments generally supportive of the report’s findings. The ECB report seemed to agree with Liikanen with the statement, “in general, the Eurosystem sees merit in separating certain high risk activities of financial institutions that are not associated to the provision of client-related services.”

However, it seems that there will be some moderation in the approach, with additional comments in the report including, “further analysis is warranted on the possible scope for allowing market-making to be carried out by the deposit taking entity, subject to certain limits.”

What Does This Mean for Investment Banking Industry Job Seekers?

It seems as though European financial reform will take a moderate approach after all. This is significant for the investment banking industry as strong armed changes to the structure of the financial industry may have forced many investment banking jobs offshore, or in the extreme case, forced the closure of many large European financial institutions.

While the extreme case may be off the table, additional restrictions on risk taking and increased regulatory compliance requirements and oversight are on the way. As a result, most institutions will be under increased pressure to ensure their investment banking arms are producing returns in excess of their cost of capital. If they are not, the banks as a whole may be better off accepting the lower regulatory requirements of an institution without riskier investment banking divisions. This increased pressure will bring about job cuts, the closure of “redundant” offices and more streamlining of operations. On the other hand, the heightened level of regulation may bring about new and expanded job opportunities in compliance related activities.

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