12 Apr 2018

Impact of Regulation on Banks' Capital Markets Activities: An ex-post assessment

Executive summary has been translated into French, German, Italian and Spanish.

AFME has today published a new study, Impact of Regulation on Banks’ Capital Markets Activities: An ex-post assessment, which was produced in collaboration with PwC.

While there have been many forward-looking studies examining how banks may respond to regulatory reforms, this study is the first that examines how banks have actually responded to regulations 10 years on from the global financial crisis.

The study draws upon data across a selection of 13 global banks - which in aggregate represent 70% of global capital markets activities - covering three years of data: 2005, 2010 and 2016 as the latest full year of data available.

Key findings include:

  • The aggregate annual regulatory cost that applies to capital markets activities across the 13 banks in our sample is estimated to be approximately US$37bn, representing 39% of total capital markets expenses in 2016.
  • Capital and leverage requirements are the most substantial drivers of regulatory cost and account for almost 90% of the total regulatory impacts.
  • Regulation drove a 14 percentage point reduction in (pre-tax) capital markets return on equity (ROE) from 2010 to 2016 (from 17% to 3%) before banks’ mitigating actions via deleveraging, cost reductions or repricing. Following such actions, overall ROE (excluding one-off charges) recovered to 11% by 2016.
  • Rates and credit activities have been most impacted by regulation in ROE terms.
  • Higher regulatory costs and low returns have been significant drivers of assets deleveraging in banks’ capital markets activities.
  • Regulation alone accounted for about two thirds of the net 39% decline in capital markets assets across the sample of banks between 2010 and 2016, with pronounced falls in rates, credit, commodities and equities assets.
  • Macroeconomic trends and non-regulatory factors also explain some of the movement in assets.
  • Broad trends of deleveraging across regions suggests these are global in nature, and not limited to individual firms or regions.

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