Boom times for bank trading have gone, and may never come back

Sun May 11, 2014 9:12am EDT
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By Jamie McGeever

LONDON (Reuters) - The boom years of financial market trading, when banks made unprecedented profits from bonds, currencies and commodities, may be over for good as financial firms realize there will be no cyclical upswing on their dealing desks.

Even though it's taken Western economies several years to regain pre-crisis national output levels, many doubt banks will ever revisit the pre-crisis high watermark of their trading activities.

Revenues from fixed income, currencies and commodities - the so-called 'FICC' universe - continued to tumble for most major U.S. and European banks during the first quarter of 2014, increasing the pressure on them to rethink business models.

Thanks to a more stringent regulatory environment and a potential turning point in the 20-year cycle of falling global interest rates, the twin peaks of just before and after the 2008 global financial crisis look unlikely to be revisited.

Revenue from FICC trading, which critics sometimes dub "casino banking" and distinguish from traditional investment banking services like underwriting share issues or arranging mergers and acquisitions, still accounts for over 70 percent of banks' overall income, according to research by Freeman.

FICC income at Goldman Sachs (GS.N: Quote) last year was 72 percent of the bank's overall revenue, compared with 82 percent in 2010. Morgan Stanley's (MS.N: Quote) FICC revenue was 70 percent of its total, well down from 82 percent in 2003.

As new regulation bites and extraordinary monetary and economic policies smother extreme market swings, the trading volumes and price volatility that middlemen banking traders thrive off has ebbed.

And it looks like a structural shift rather than a cyclical or temporary lull.   Continued...

A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file photo. REUTERS/Luke Macgregor/Files