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Regulation means the end of casino banking—which is fine

Reuters reported on Monday morning what many investment banks have been saying for several quarters now: that increased regulation has made it more difficult for banks to profit from trading fixed income, currencies and commodities. According to the article:

“Revenues from fixed income, currencies and commodities – the so-called 'FICC' universe – continued to tumble for most major U.S. and European banks during the first quarter of 2014, increasing the pressure on them to rethink business models.”

While we all hope and pray for higher bank profits, this may be a case where we must acknowledge that regulation serves a greater good. A freewheeling, everybody pretend this isn't happening environment existed prior to—and caused—the 2008 financial crisis. It was an environment that unfortunately favored high-risk trading, as traders and executives knew they could reap huge bonuses if their bets turned out well, but, as it wasn't their money to begin with, they stood to lose very little if their bets went south. Most figured they would probably have a reasonably soft landing, even if their irresponsibility knocked the wheels of the world. And when the wheels did come off the world, most of those responsible did, in fact, land much more softly than the rest of us.

It is worth asking whether regulation is really causing banks to ease off on this kind of trading, as the mere fact that bank profits are down proves little. Focusing specifically on Goldman Sachs (GS), the news is mixed, according to the article:

“Revenue from FICC and equity trading, which critics sometimes dub 'casino banking' and distinguish from traditional investment banking services like underwriting share issues or arranging mergers and acquisitions, still accounts for over 70 percent of banks' overall income from investment banking, according to research by Freeman Consulting.

“FICC and equity trading income at Goldman Sachs last year was 72 percent of the bank's overall revenue from investment banking, compared with 82 percent in 2010…

“The FICC share of these trading revenues is shrinking. In 2007 around 70 percent of Goldman's $22.89 billion (13.5 billion pounds) overall trading revenue came from FICC. Last year, barely half its $15.72 billion of such revenue was from FICC, according to Freeman.

That so called “casino banking” still accounts for 70% of investment banking income is both surprising and troubling. It may be that there is no way to stop these huge entities from engaging in unsafe trading. We can only hope, therefore, to find some way to make sure that they share equally in any future pain their trading causes.

If they find that prospect too daunting, they are always welcome to go back to making money by providing society with actual financial services.

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.