European investment banks have a long history of trying, and failing, to make their mark in U.S. investment banking. The barriers to success may be about to get higher.
In a note released last week, Jemel Omahen, a banking analyst at Goldman Sachs, suggested European investment banks face a more challenging future on Wall Street. Deutsche Bank, in particular, could struggle.
Goldman said a new Federal Reserve proposal that foreign banks operating in the U.S. must adhere to strict new capital rules may be a particular issue for the German bank. Under rules proposed last December, foreign banks operating in the U.S. market will have to group all their subsidiaries under a single holding company and be subject to the same capital rules as U.S. banks.
The Fed is inviting comments until April 30, but Omahen said the proposals have a strong chance of being implemented. If they are, he estimates that Deutsche's US subsidiary 'Taunus' will need a capital transfer of more than US$13bn before the introduction of the new requirements on July 1, 2015.
Omahen doesn't say so explicitly, but a massive increase in capital costs could be bad news for Deutsche's investment bankers on Wall Street. Deutsche doesn't break out how many people it employs in the U.S., but several thousand staff are thought to work at the German bank's Wall Street office. Deutsche is a major force in US fixed income trading and the fifth-ranked fixed income bank in the U.S.according to figures from Thomson Financial. Increased capital requirements are often a catalyst for rethinking entire business areas, said Ian Gordon, a banking analyst at Investec in London. "Increased capital requirements reduce the returns offered by banking businesses, making them less viable and leading to retrenchment," Gordon said.
In other words, Deutsche could be compelled to lay off Wall Street bankers as it shrinks to mitigate the need for new capital.
As an alternative, Omahen said Deutsche could shift capital from its global business into its U.S. business. However, he said this could raise concerns about capital levels at the bank elsewhere in the world.
Deutsche declined to comment on the new capital rules or Goldman's note. One Deutsche insider said it's still early days and that the rules could yet be softened prior to their introduction. Michel Barnier, the European Commissioner responsible for financial services, has said that he's "very concerned" by the new US proposals.
Deutsche Bank isn't the only European bank that Goldman thinks will suffer if and when the new capital requirements are introduced. Barclays could also find itself, "impacted materially," said Omahen. RBS is seen as being only "moderately at risk." Omahen said there could also be "operational impacts" at BNP Paribas, although the overall effects of the new rules at the French bank are expected to be "manageable."