Banks get smaller slice of trading cake

The crumb-gathering business is not what it used to be.

"Just imagine that a bond is a slice of cake," said Judy McCoy, wife of Sherman, the self-styled master of the universe, in Tom Wolfe's The Bonfire of the Vanities. "Every time you hand somebody a slice of that cake, little crumbs fall off. And you're allowed to keep those crumbs."

The first quarter was a good one for the banks, in that respect. Revenues from trading bonds and other financial instruments might have lifted Morgan Stanley to its best quarter for seven years, figures could show next week. Others did well too, boosted by heightened volatility in interest rates and currencies.

But the bigger picture is that the crumbs are adding up to less and less. According to analysis from Oppenheimer, global banks' trading revenues as a percentage of total equity and bond market capitalisation have roughly halved since the crisis, from about 12 basis points to 5 or 6.

That reflects a big regulatory squeeze. Since Lehman Brothers failed, regulators have gone all out to make the banking system more stable, by curbing proprietary trading while imposing tougher capital and liquidity requirements.

Meanwhile, with the US Federal Reserve holding rates near zero, core revenues for the banks have been remarkably steady. Another piece of analysis by Oppenheimer shows that total net interest income at six of the biggest banks has ranged between $50.6bn and $52.4bn in each of the past 12 quarters.

Judging by spreads in credit markets, where investment-grade banks have converged with single-A rated industrials, the likes of Citigroup and Bank of America have become the "new safe havens", says UBS.

Things are unlikely to get much racier in coming years. By the end of 2015, global regulators should have given banks a better idea of the kinds of equity and equity-like debt they need to hold by 2019, when new rules take effect. Even State Street, which aced last month's US stress tests, has a shortfall of about $2bn on CreditSights' estimates.

Six or seven years on from the crisis, the banks may not be significantly safer. They may not be better managed. But the way investors look at it, they are a lot less exciting.

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