It turns out that the world of ZIRP/NIRP isn't the banking paradise that some thought it would be. See Why The Big Banks Want Higher Interest Rates.
Whether the problem is with low interest rates themselves or the fact that rates still aren't low enough to ignite a new credit boom is not clear. What is clear is that the world's money center banks are facing a brutal downsizing. From today's Wall Street Journal:
Credit Suisse Group AG, Standard Chartered PLC and Deutsche Bank AG, all under new chief executives, are among banks facing muted growth in their home markets and coping with more stringent regulation and capital requirements.
Those issues, coupled with factors including uncertainty over China's growth, U.S. interest rates and the slide in global commodities prices, have combined to depress profits for European banks.
Deutsche Bank late on Wednesday took a multi-billion-dollar charge against assets in its investment bank and retail- and private-banking operations for the third quarter. It said the charge would materially impact third-quarter results, which it reports on Oct. 29. New chief executive John Cryan on that day will announce a new strategy, widely expected to ratchet up the bank's earlier attempts to cut costs and shed unwanted assets.
Credit Suisse Chief Executive Tidjane Thiam, who joined the bank in July, is expected to outline sharp investment banking cuts, as part of an effort to meet global capital rules and new Swiss bank-specific requirements. The bank is also thought to be readying a substantial capital increase to be unveiled alongside Mr. Thiam's grand plan.
A poll of investors by Goldman Sachs analysts found 91% expected the bank to raise more than 5 billion Swiss francs ($5.16 billion) in fresh capital.
On Thursday, in response to an article in the Financial Times that reported that Credit Suisse planned to raise an amount in line with that figure, the bank said: "we are conducting a thorough assessment of Credit Suisse's strategy, evaluating all options for the group, its businesses and its capital usage and requirements."
Standard Chartered, under new chief executiveBill Winters, is also considering raising equity, according to analysts and people familiar with the matter. Standard Chartered is among U.K. banks most exposed to commodities and China, two markets under intense pressure in recent weeks. The bank could raise as much as $8 billion, according to Jefferies analyst Joseph Dickerson.
At Barclays, investment banking head Tom King last month told analysts the division is smaller but better positioned after a two-year process of going from being a balance sheet, revenue-focused investment bank "to a much more returns-based model."
He said the bank saved costs by cutting back on managing directors, the highest internal rank below the most-senior executives, which typically includes division heads and trading desk managers. Barclays previously has said around 7,000 jobs in all will be cut in the unit.
The bank is set to name a new CEO within the next few months. Barclays officials say the post may go to a former investment banker, raising the likelihood of more structural tweaks.
Elsewhere, HSBC Holdings PLC previously has said it is ending relationships with hundreds of clients who weren't making it enough money. In the third quarter, it continued a reduction of assets it loaded up on before the financial crisis, such as U.S. mortgage-backed securities.
Chief Executive Stuart Gulliver said in August that HSBC's Global Banking & Markets business is "the right size" in terms making money and serving clients but that low-returning loans and other boom-time assets were eating up too much of the unit's capital.
Meanwhile, Royal Bank of Scotland Group PLC continues to slash jobs and pull out of countries covered by its investment bank. The bank cut several high level capital-markets jobs last month and assigned new responsibilities to sales head Scott Satriano, now head of financing & risk solutions, and Kieran Higgins, who took over flow sales in addition to being head of sales.
The British bank, 73% owned by the government, has taken the most-radical moves in moving out of investment banking to focus instead on lending to domestic businesses and households.
Meanwhile, in the US big banks have (finally!) become safe targets for ambitious politicians. Under leftward pressure from Bernie Sanders and Elizabeth Warren, Hillary Clinton -- who despite a chaotic early campaign is still the likely next president -- is talking about financial transaction taxes (which would expose the obvious fraud of HFT) and, now, bank fees that escalate with size. Also from today's Wall Street Journal:
This is a potential earthquake on a couple of levels. First, the big banks have dominated the developed world's political landscape so completely in recent decades that no major politician has been able to stand up to them. Public policy, as a result, has been by, for and all about the financial sector. The bailouts of 2008/2009 were designed to keep Goldman and JP Morgan in business, not to keep individuals in their homes and jobs.
Now, with banks laying off whole layers of senior management and entire trading desks there will presumably be a lot less free cash to buy future elections, allowing public policy to tilt back to Main Street. In other words, here comes "QE for the people."
Second, the amount of leverage the big banks now employ to generate derivatives fees and manipulate markets is such that scaling back carries systemic risks of its own. In other words, it's not clear that the financial system can get from here to there (there being smaller, more rational and clearly sustainable) without several major derivatives books blowing up and taking down a daisy chain of counterparties. So "too big to fail" might turn out to be "too big to restructure," which would make the coming year one for the history books.