Investment banks feeling the pinch from increased regulation since the financial crisis could reap an earnings reward from a boost in trading activity under the European Central Bank’s (ECB) trillion-euro quantitative easing (QE) program.
The flood of money into markets from the ECB’s bond-buying has brought an increase in the volatility that traders crave as investors stake bets on the impact the scheme will have on inflation and long-term interest rates.
“QE is likely to underpin a sustained period of strength in euro capital markets,” Citigroup said in a research note on Friday. “There has been a sharp spike in rates and foreign exchange volatility, which also points to a strong quarter for wholesale banks’ macro revenues.”
Revenue from fixed income, currencies and commodities trading, the so-called FICC universe, have historically been a rich source of profit for banks, but new capital rules and moves towards electronic trading have squeezed the sector in recent years.
The 10 biggest investment banks’ revenue from FICC fell 7 percent in 2014, industry analytics firm Coalition calculates.
What’s more, the investment bank balance sheets that support trading markets have declined by 20 percent since 2010 and by 40 percent in risk-weighted asset terms, Morgan Stanley analysts estimate. The analysts said that a further 10-15 percent reduction is likely over the next two years.
The trading environment in Europe, however, could be about to take a turn for the better.
“ECB moving to QE could provide a real fillip to earnings,” Morgan Stanley analyst Huw van Steenis said. “Fixed income trading may buck the trend of five years of shrinkage.”