Banks deploy balance sheets less aggressively
Goldman Sachs CEO Lloyd Blankfein recently said that, "For the first time, it's clear that size and complexity come with a higher cost."
There's little doubt there are higher costs. If you are considered a G-SIFI, you will be required to meet higher capital ratio standards per Basel III, for example. And the costs of Dodd-Frank fall heavily on larger banks. One could quibble that the implicit quid pro quo here is that all G-SIFIs also enjoy a layer of security in that the world is convinced that such institutions will be given assistance if they run into trouble.
It was not supposed to be that way, but the bond market has priced that assumption into prices. All in all, however, the conventional wisdom seems to be that the net costs of doing business will be higher, which necessitates some changes. Blankfein notes up to 70 percent of stock shares are now traded through "low-touch" channels, according to DealBook.
"Electronic execution accounts for significant portions of activity in the firm's cash fixed-income business as well," he said.
Other banks are latching onto this as well. UBS was said to have replaced human derivatives traders with algorithms as part of its cost-cutting and reorganization drive. In the end, however, it's not pristinely clear that the Volcker Rule, Basel III, the new OTC derivatives rules will curtail business in secular fashion. Most people assume that banks will have to deploy its balance sheet less aggressively.
That seems to be true for now, but you can never truly predict the future. Many are convinced that we're seeing a generally cyclical turn in the cycle, with an upswing around the corner.
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