Week in review
Economic uncertainty continues
Mario Draghi earlier this week stated that the ECB strategy for battling the eurozone sovereign crisis was starting to work, only to suffer a setback yesterday with S&P’s ratings action, stripping France and Austria of their AAA rating and downgrading Italy to BBB+ from A. Beyond the obvious impact on investors, there will also be a technical impact for banks, especially in Italy, that may now be unable to enter into critical swap agreements, for example.
Banks still affected by economic situation
The effects of the economic turmoil in 2011 on banks’ results are plain to see. Expectations are that banks’ profits for Q4 2011 will be lower across the board. JP Morgan announced a 23% drop in profits yesterday, ahead of announcements from most major banks next week. The lack of confidence engendered by the eurozone crisis is most often cited as the reason for the lacklustre performance.
Unsurprisingly, 2011 has been a bad year for employment in the banking sector, with the WSJ positing that the job losses reflect more than a cyclical dip. Last year also saw an unusually large number of partners departing from Goldman Sachs, mainly due to the shrinking business, although they may just have decided they were wealthy enough and called it a day.
Hedge funds arguably came out of 2011 looking even worse than banks however, with 60% posting a loss, even though they should nominally be able to make profits in down markets.
Regulatory pressures continuing
Meanwhile, the introduction of new regulations for the financial markets continues apace. The Basel Committee declined to extend the deadline for banks to meet imposed liquidity buffers, although they offered some concessions on the level of the buffers in times of crisis and the overall composition.
In addition, the Financial Stability Board extended the applicability of the “too big to fail” rules to include what it calls local “systemically important” institutions (i.e. within a country) and also clearing and settlement institutions. With regulators wanting to see more OTC derivatives trades cleared through CCP’s, this rule makes sense, but it will be interesting to see how the CCP’s and their clients respond.
Market infrastructure consolidation continues to rumble
In the market infrastructure landscape, the week was dominated by the news that the European Commission advised blocking the proposed merger between Deutsche Börse and NYSE. Apparently undeterred by the failure of $37bn in deals last year however, Nasdaq is reorganising its top management structure, perhaps to facilitate future takeovers. The last word on consolidation in the sector has not yet been spoken.
Technological evolutions
Finally, Spanish bank BBVA announced it is moving all its 110,000 employees to Google Apps, including using Gmail for email and Google Docs for office productivity. Bold move.
