Stories, trends, deal makers and breakers, investors and seekers. Read about PE investment deals, M&A, capital markets and business in general, right here!

Wall Street on the Firing Line

Staying relevant means, you HAVE to embrace change. 2016 has started out with a shudder and a scream in the financial markets, and the big question is should we be expecting a bang to follow? Whichever way this volatility unfolds as a longer-term trend, what is very clear is that big banks are in trouble (again).

2016 has started out with a shudder and a scream in the financial markets, and the big question is should we be expecting a bang to follow? Whichever way this volatility unfolds as a longer-term trend, what is very clear is that big banks are in trouble (again). In just a few weeks we have seen the mounting evidence in announcements from a slew of large European financial institutions of hiring and salary freezes and extensive layoffs.

In reality this is a continuation of a long-term trend as global banks have been laying off staff since the financial crisis hit in 2008 and although it may have moderated somewhat in recent years, around the middle of last year layoffs began to pick up steam again. As compared to the equity markets, which have been bouncing around as chaotically as a beach ball on a gusty shore, the banking employment trend, particularly in the Eurozone, continues to head steadily in that downward direction.

HSBC was the latest to announce a worldwide salary and hiring freeze last week, as part of a global cost cutting initiative that seeks to reduce expenses overall by $5 billion in the next 2 years. In order to achieve its cost cutting goal HSBC said it intends to cut total employment by almost 20%, with investment banking slated for even more severe cuts.

The other major European banks that have already announced their own massive cutbacks include Deutsche Bank (which is targeting 35,000 jobs for elimination), Standard Chartered (seeking to cut 15,000 jobs), Barclays (which has already announced headcount reduction of 7,000 in the investment bank alone), and Credit Suisse. In the next few weeks, additional layoff announcements are expected to come from Barclays and BNP Paribas.

So what does this all mean? The old clichéd hiring-firing policies of the banking industry may have worked (at least somewhat) over the decades, expanding and contracting payroll in an accordion like fashion over the course of the business cycle. But it’s clear that this approach doesn’t work any longer. Why? Because the entire world has changed, and while in years past, voids were created and then filled by rehiring, businesses now have the ability to rationalize their business processes through innovation and technology. Such an approach has been embraced in virtually every industry other than banking – finding ways to use technology to increase output and productivity as market conditions improve, instead of allowing the organization to bloat. But banking, especially investment banking, remains an exception, and still responds in the traditional fashion.

That reminds me of Einstein’s definition of insanity – “doing the same thing over and over again expecting different results.” Sometimes that seems to be the only way to account for the behavior of the financial industry, as it continually adds and subtracts people in an attempt to solve the same problem. But there are too many exceptionally smart, experienced and hungry people in the financial markets to support the conclusion that the entire industry has gone mad. Instead, I think the better explanation is simply that the world of finance is incredibly fearful and resistant to change and even more fearful that is on the verge of losing relevance.

So far the layoffs have been much less severe among U.S. banks, which suggests that the moves by the European banks are in large part motivated by the particularly weak market conditions in the Eurozone. But as quoted in a recent story in the Financial Times, the highly regarded banking analyst Mike Mayo of CLSA (my old house) expects that many U.S financial institutions will soon find themselves following suit, with cuts most likely to be made in investment banking operations. By some recent estimates, investment bank headcount on Wall Street could see reductions of up to 10% in 2016. And that’s on top of the 50% IB headcount reduction since 2008.

The challenges confronting large financial institutions are coming from multiple directions – both in terms of the economic and regulatory environment. On the economic front, with most experts expecting a slackening in the pace of big mergers and acquisitions as a result of continuing market turbulence, investment banking fee income is likely to be under severe pressure this year. Also worth remembering that many of the large acquisitions are being run on a founder-to-founder level (in tech at least) thereby bypassing Wall Street entirely. Even many of the larger IPOs that (at least for now) can’t happen without the IBs are being directed by Silicon Valley (squeezing traditional fees to wafer thin levels). At the same time, a whole host of regulatory changes being phased in over the next few years will affect almost every aspect of banking operations, from capital markets, to payment systems, to reserve requirements, resulting in increased costs and further compression of margins. Great! Just what the industry needs. In a slow-growth economy, that would seem to be a sure fire recipe for more cutbacks and layoffs.

And as we’ve written before, technology presents another huge challenge for large financial institutions. Increasing innovation and competitive pressure from the Fintech sector, puts further stress on large banks to increase their own tech spending. Yet as we see it at Aurigin (formerly BankerBay), technology operates as a double-edged sword in financial markets. It may bring a host of nimble new competitors into the market, which will nip away at the big banks’ market share, but at the same time technology offers a great opportunity for financial institutions of all sizes to streamline and rationalize their operations. Technology used in the right way will only increase efficiencies, and that HAS to be a good thing. Whilst many Fintechs are competing with the banks, at Aurigin are trying to make the banks, better banks.

Staying relevant means, you HAVE to embrace change. As I’ve mentioned before, I frequently field inbound requests to discuss Aurigin with many if not most of the large global banks. We are called in to talk tech and innovation – clearly a directive from the board level. But beyond these initial talks, nothing seems to happen. We see little or no indication that senior management at global banks is putting any kind of forward-looking strategy in place. This needs to change and needs to change fast. I believe in investment banking, I believe in the value it provides to the economies of the world. But the banking industry needs to get better, smarter and leaner and it needs to do that NOW.

Our own Aurigin platform provides a perfect example of how technology can help financial institutions of any size, particularly in a cost-cutting environment, in which everyone will be expected to do more with reduced headcount. It’s time to get lean and get smart Wall Street. In the iconic words of Jerry Maguire, “Help me, help you!” Embrace change, embrace technology as the driver of that change and you will stay relevant. I fear that if banks fail to do so, they will lose relevance and commercial sustainability very quickly, and it’s already started to happen.