A big wheel at Deutsche Bank, chief risk officer and board member Hugo Bänziger, has some portentous thoughts about banking (and therefore, about New York City and State finances) in today’s FT. In the trading world,
[profit] margins will compress because electronic clearing standardises products and makes pricing transparent. … [T]he advantage of banks’ proprietary trading platforms will thus diminish and new competitors (derivatives exchanges, independent brokers and hedge funds) will join the fray. Investment banking will become far less profitable than in the past. Return on equity will drop to levels where safe utilities trade. …
Salaries will have to normalise to levels comparable to other services industries.
Bänziger is saying that we can expect the same thing that happened to stock trading starting nearly four decades ago will happen to derivatives trading.
Back then, regulators abolished fixed stock-trading commissions, allowing upstarts such as Waterhouse to offer to execute customers’ trades at cut-rate prices. New competition — and later the internet — killed the investment world’s profit margins in buying and selling stock for clients.
That’s partly why investment banks started pushing derivatives instead.
But as regulators push derivatives away from banks’ private books and onto central clearinghouses and (optimally) open exchanges, new competition and openness will push derivative-trading profit margins down, too.
That may be good news for society as a whole, but bad news for New York.
And even if Bänziger is overstating the case, he’s closer to the mark than New York’s budgeters.
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