Investment Banks To Cut 40,000 More Jobs, Shrink Global Footprint; Partly Due To Basel III

By Moran Zhang | November 21 2012 2:29 PM

Investment banks are set to slash another 40,000 jobs in the next few years on top of cuts that have already been announced, and at least a third of them will end their global ambitions. The cuts reflect new international rules drawn up in response to the 2008 financial crisis, known as Basel III, that have dented returns and put banks under pressure to either raise more capital or sell off assets.

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Deutsche Bank AG (FRA: DBK) co-Chief Executive Officer Anshu Jain said Wednesday at a conference in Dubai that he expects “significant consolidation” in the global banking industry amid new regulations on capital requirements, Bloomberg reports. “Only a few strong, large universal banks will remain,” including Deutsche Bank, Germany’s largest lender, Jain said.

The Basel III rules are considered a critical step to ensure that large institutions are sufficiently cushioned against future financial shocks. But such new regulations have led to the “unintended consequence” of consolidation in the sector as some banks retreat from previous plans, Jain said.

Based on the bank capital proposal, banks will be required to hold the strictest form of common-equity capital at 7 percent of their risk-based assets, up from 2 percent currently. The largest global financial institutions are required to hold additional capital buffers of between 1 percent and 2.5 percent. The international agreement called for the regulation to be phased in between January 2013 and January 2019.

The industry has stepped up restructuring programs, reducing headcount by about 15,000 since mid-2011 and announcing another 25,000 job cuts, according to a November report by Roland Berger Strategy Consultants.

The Zurich-based UBS AG (NYSE: UBS) became the latest European bank to pare back when it unveiled plans last month to fire 10,000 bankers in one of the biggest banking job culls since the implosion of Lehman Brothers in 2008.

The loss of 10,000 bankers represents more than 15 percent of the Swiss bank's workforce, which will fall to a total of 54,000 employees by 2015. The restructuring is expected to save UBS more than $3.6 billion over three years, according to the firm's estimates.

Also in October, Deutsche Bank said it would cut 1,993 jobs, a slight upward revision of the 1,900 number disclosed by the bank in July.

Global Footprint

Roland Berger predicts that of the 14 truly global investment banks, at least five will retrench to become regional players or focus on niche product areas over the next three to five years.

“The number of banks still keen to play the role of being a global multi-location universal bank has shrunk,” Jain said. “The price of being global has gone up dramatically, and the desire to be a global bank has dropped off.”

The U.K.-based HSBC Holdings plc (NYSE: HBC) said Monday the firm is negotiating with an unnamed potential buyer for its 15.6 percent stake in China's second-largest insurance company, Ping An Insurance (Group) Co. of China Ltd. (HKG: 2318), in a deal that could see the bank make a profit of roughly $7.5 billion on its original investment.

Talks on a sale came as HSBC is moving to get rid of noncore businesses to slim down and increase its profitability. The firm’s strategy includes cutting about 30,000 jobs, retreat from some countries and focusing more on attracting wealthy customers.

Roland Berger predicts that the sector will achieve an average return on equity of 11 percent this year. But this would shrink to 8 percent if incoming capital rules were already in place -- well short of most banks’ targets of 12 to 15 percent.