A new version of the Volcker rule may force U.S. banks to cede their capital market share in credit, sovereign and emerging market sectors to European capital market banks, notes Bernstein.
Brad Hintz and team at Bernstein Research believe a unilateral prohibition by U.S. regulators regarding OTC market making can radically change the global market shares and competitive positions of the leading U.S. fixed income participants.
New Volcker rule expected on December 10th.
The Volcker rule is a group of special provisions of the Dodd-Frank bill on financial regulation. The rule restrains banks from making speculative investments that do not benefit their customers. The provisions were originally set to be implemented in mid-2012, but delays have pushed the date back.The rule will address a huge swathe of financial institutions. The most egregiously affected are likely to be the biggest and most complicated banks, including Bank of America Corp (BAC)" class="ticker" target="_blank"> (BAC), Citigroup Inc (C)" class="ticker" target="_blank"> (C) and JPMorgan Chase & Co. (JPM)" class="ticker" target="_blank"> (JPM). Bernstein analysts point out a new version of Volcker regulations is expected to be made public on December 10th by the five major regulators overseeing the U.S. capital markets and the banking system. Citing Standard and Poor's estimates, Bernstein analysts point out that the Volcker rule could cost the eight largest U.S. banks a total of $2 billion to $3 billion per year in pre-tax earnings under a less strict regulatory interpretation of Dodd Frank and $8 billion to $10 billion per year if a more strict rule is established.
Institutional equity business would remain attractiveAccording to Bernstein analysts, even if the most onerous interpretation of Volcker were to be approved, the institutional equity business will remain economically attractive for the bulge bracket ECM underwriters. The analysts believe the highly profitable equity capital markets revenues of investment banking where pre-tax ECM margin is over 40% justify maintaining the costly equity secondary trading and execution businesses.
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