Have banks hired too many young people who won’t be able to cope with a reversion to historical norms? This, according to the Wall Street Journal, is the icy fear gripping the nether regions of some senior banking executives as rate rises go from talking point to tangible reality.
The last time US interest rates were hiked was June 2006. Since then, banks have become engorged with a generation of young traders and strategists who have become highly adept at dealing with a low rate environment but know nothing about a world where rates are going up.
Barclays, for one, has been taking some definitive action. - Last year, the British bank reportedly began identifying which of its traders had never lived through a rate rise. There were quite a few and some of them were pretty senior. “You could have a vice president who is now considered an expert trader who has never seen a rate hike,” Mike Yarian, head of rates trading for the Americas and Europe, told the Journal.
Other, unnamed, banks have been looking at the issue too. Neil Schofield, principal at U.K.-based Financial Markets Training, said he's run training courses on what happens after rates are hiked for traders at two 'top US banks.' Schofield says all traders are out of practice - even the most experienced ones don't understand how the principals of different bond maturities move in relation to one another and the most junior ones don't really know how to calculate the forward price for a bond under a specified investment horizon - something which requires reworking every time rates change. Other seasoned traders tell the WSJ that neophytes are too flighty and lacking in strategy: "“They’re all sitting at their desks with their iPhones and putting in trades as soon as they see news,” says one. You have been warned.
Separately, Bloomberg has run some figures on people let go from European investment banks over the past five years. The numbers are stark: it calculates that 30% of jobs at European investment banks have disappeared since 2010. With Deutsche, Barclays and Standard Chartered under new management the bloodletting isn't over yet. "The Europeans have tried to shrink their way to profitability and that destroys the franchise and income line,” Bernstein banking analyst Chirantan Barua, told Bloomberg. “That’s why you have seen a revised strategy every two years.”
Credit Suisse and UBS could be compelled to make further cuts to their investment bank if Swiss lawmakers vote to increase capital from 4% to 10% of loans and investments and for a mandatory separation of investment banking activities from the rest of their operations.(WSJ)
William Vereker, head of corporate client solutions at UBS, says there are more difficult decisions ahead of European investment banks than behind them. (Thomson Reuters)
Lloyds paid a trader a £175k salary and a £50k bonus. He claims he was laid off for whistleblowing. (Guardian)
Citi says its equities and fixed income sales and trading business suffered a combined 5% year-on-year revenue decline in the third quarter. The strong third quarter in 2014 didn’t help. (Bloomberg)
Don’t blame banks for the business cycle, says Lloyd Blankfein. (Business Insider)
“Historically a number of people have made a run at Bloomberg,” he said. “So far they’ve all ended up road kill.” (Financial Times)
Tom Hayes at a lucky turnstile when he entered UBS's Tokyo office. (WSJ)
Background positive music increases people's willingness to do others harm. (British Psychological Society)
Photo credit: Brookings Institution