Kian Abouhossein and his team of financial services analysts at JPMorgan have issued a new report warning on the threat that central counterparties pose to the stability of the global financial system.
By introducing a single counterparty to both sides of a trade, they suggest central clearing has merely transferred systemic risks from banks to clearing houses. And with a higher proportion of $650 tr OTC derivatives market being cleared centrally in future, central clearers' potential to become a centralised source of contagion is increasing.
As a result, Abouhossein et al think investment banks will have to set more capital aside to cover their exposure to central clearers, further eroding their return on equity, further necessitating cost reductions in order to keep investors happy and make their business viable.
Which brings us to the main point of this post.
In the new world, in which banks have to cut costs substantially to get back to an ROE of 10-13%, Abouhossein and friends think some banks will pay substantially worse than others. BNP and Morgan Stanley look best avoided. Deutsche, Goldman Sachs and Barclays Capital are best in class. JPMorgan is sadly omitted from the analysis.