In the lead up to the financial crisis, European investment banks were on top, leading global league tables and snapping up their American rivals in major acquisitions. According to an in-depth report from the Economist, even as the crisis began to take shape, many in the industry were suggesting the dominance of European banks would continue as their American rivals struggled and, even in some cases, went bankrupt. Then, the crisis shifted home for the major European players and the game changed entirely.
Since the crisis, many of the large players have scaled back their investment banking operations substantially, sometimes due to financial performance, yet more often due to regulation changes. Only two major players remain in the industry, despite the remnants of RBS, UBS and others playing a peripheral role within Europe. Barclays, the leading British institution, and German-based Deutsche Bank now account for the majority of market share in the Eurozone.
European Banks Lag Their American Peers
Despite reduced competition at home, the two European giants remaining are struggling to keep pace with their American peers. When comparing price to book ratios, the two European giants trail behind the two largest American investment banking institutions, namely Goldman Sachs and JPMorgan. The discount reflects a number of factors, but perhaps more glaring is the difference in outlook regarding regulation between the two jurisdictions. While American regulators are certainly not taking it easy on the investment banking industry, there is a perception that their moves are more predictable and will likely be more incremental than the regulators across the pond. European regulators are increasingly taking a hard line against some trading activities, and some senior European officials are seen as desiring a hard split between investment banking and traditional banking activities. This could mean either a considerable reduction in available capital for use in investment banking, or smaller sized institutions which would lead to decreased administrative efficiencies.
Bonus Pools the Latest Victim of Cuts
Whether in Europe, North America or Asia, investment banks are being forced to adopt leaner operations in order to justify their existence within the broader portfolio of a diversified financial institution. No longer are large scale bonuses a fundamental reality of the job, especially if results are not there to justify the payouts. According to New Statesman, European investment banks will be actively trimming their bonus pools for 2012, by 20 percent, potentially widening the compensation gap with their American peers. How this impacts the competitiveness of the European institutions in retaining top talent remains to be seen.
Much of this reduction in bonuses is due to the desire to shift more return to shareholders. Increasingly, investment banking operations are facing pressures from top bank management and boards of directors, to justify their returns on invested equity, which have trailed commercial banking’s now for several years. Until investment banks begin to see a sustained increase in profitability, bonuses will continue to be under pressure as bank executives demand margins that satisfy shareholder expectations.