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Streetwise Professor

January 26, 2013

This Wasn’t How They Told Us It Would Work-But It Was Pretty Obvious That It Would Work Out Like This

More indications that Frankendodd, Basel III, and other measures intended to reduce the risk in the banking system, and to address the too big to fail problem, are leading to greater consolidation of the banking sector:

Investment banks must take further actions to improve returns and more will follow firms like UBS AG (UBSN) and Royal Bank of Scotland Plc  that have exited businesses, McKinsey & Co. said.

Only five or six companies will remain “bulge bracket” firms that offer all investment banking and trading products worldwide, the consulting firm said today in a report titled “After the Reckoning.” Others will step back from some businesses to focus on areas where they have a competitive advantage, according to the report.

. . . .

The top three firms in each asset class account for about two-thirds of trading volume in that product, according to the report. Banks that lack such scale or face higher funding costs will probably focus on businesses such as foreign exchange or structured rates and credit, McKinsey said.

So: increased concentration and reduced competition as some banks exit certain businesses.  The sector overall will almost certainly shrink, but the remaining bulge bracket firms will account for a greater fraction of business, and may grow absolutely.  It is also likely that these remaining firms will be as interconnected, or more interconnected, than was previously the case.

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1 Comment »

  1. I think the regulatory mindset vastly prefers dealing with a small, regulated, and profitable oligopoly to a free-wheeling, dynamic financial sector with lots of entry and exit. They can engage in bargaining over the rents and expect the incumbents to accept the legitimacy of the regulatory structure. It’s like a return to the CAB and ICC in airlines and trucking, only with more amorphous and opaque rules and more chances for regulators to profit via the revolving door.

    Comment by srp — January 26, 2013 @ 7:04 pm

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