The "hot" trend on Wall Street, the Wall Street Journal reports, is to be boring.
In response to the soon-to-be-implemented international banking regulations (Basel III) and the recent reduction in stock trading volume, the WSJ reports that banks are gradually returning to their traditional business practices, which include trading, managing and advising on behalf of their clients.
The Basel requirements will force banks to hold more capital to guard against losses. With bigger piles of unused money, banks likely won't be able to generate the kinds of profits they were seeing in the years before the crash. (In theory, this also means they'll be less risky.) The WSJ says Thomson Reuters predicts Goldman Sachs and Morgan Stanley will see a 23 percent drop in profit from 2006 peaks.
The July financial reform legislation has also inspired some banks to trim or cut their proprietary trading desks, which make trades for the banks' own account. The WSJ reported last month that JPMorgan was phasing out its proprietary trading operations entirely. Soon after, Bloomberg Businessweek reported Goldman would likely follow suit. At the end of the month, Businessweek reported that Bank of America would fire almost a third of its prop traders.
In his Bloomberg column last week, Michael Lewis, author of The Big Short, wondered why banks were taking such drastic steps to cut prop trading, given that lobbyists were able to massage the reform into allowing banks to use up to 3 percent of their money for their own bets. An explanation, Lewis says, could be that banks have realized proprietary trading isn't as profitable as it once was. With increased government (and media) scrutiny, taking big risks, at least visibly, seems to have fallen out of style.
As Paul Krugman wrote last year, banking used to be "boring." But starting in the 1980s, regulations were lifted, including the 1999 repeal of the Depression-era Glass-Steagall Act. Government officials, including President Obama, have said deregulation helped cause the financial crisis.
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