The Riskiest Asset for Banks? Bankers
It probably goes without saying, but the financial services sector has placed a tremendous amount of trust in its computers. They're trusted to execute automated investment strategies, trusted to interact with customers, trusted to provide a truthful account of the activities of their human colleagues should the need arise for a witness for the prosecution.
In the unlikely event that some of them gather for a party at Peter Luger Steakhouse, it's a safe bet that they can be trusted not to collect and disseminate confidential information from their old computer pal who has moved on to the Federal Reserve.
It's no wonder, then, that as big banks attempt to comply with regulations meant to make them safer, they are making huge investments in technology while also shedding risky assets. The disconcerting part? It turns out the riskiest assets may be bankers themselves.
Deutsche Bank grabbed the headlines today with its plan to shrink its workforce by 26,000. (For perspective, that's more people than are employed by about two-thirds of the 24 companies in the U.S. benchmark KBW Bank Index.) For sure, the German bank has its own issues, and this may be an exaggerated example of the trend, but the trend is there nonetheless. Head counts have diminished noticeably at Wall Street's universal banks in recent years, and it would be foolish to imagine that trend reversing anytime soon.
There is certainly an opportunity for a reap-what-you-sow mentality that will be satisfying for the critics of Wall Street, and it should surprise no one that shedding riskier business units means shedding the employees who work for them.
Yet if you're employed by a big bank, it must feel like the risk/reward equation has changed considerably for the accountants examining the budget line that contains your compensation. The tolerance for mortal sins like fixing Libor rates has obviously been dialed down to zero. But even venial sins like cheating on internal training tests have suddenly been converted to mortal sins that send careers into purgatory. It's a safe bet that going forward, invitations to join an old banker friend now working for the Fed for a steak dinner at Peter Luger's will receive a polite "thanks but no thanks" as an RSVP.
You may have to remind yourself, while you're dashing off resumes to the buy side, that these developments are all good things that will make the financial system safer and more fair. There is a logic to them that can't be denied, just as there is a logic to the other factor leading to the widespread reduction in headcount: the relentless push into automation as the cannons of the fintech revolution blast louder than ever. The risk posed by human bankers here is tilted more toward profit margins than litigation, but it's a huge risk nonetheless.
The writing is clearly on the wall here, or at least written clearly in the reports that management consultants send to clients. From a Hugh Son article on Wednesday about the type of advice being dished out at McKinsey & Co:
On the sales and trading front, digital channels will become the default for transacting with clients. Coverage models will shift radically as banks ruthlessly examine every front-office routine and manual activity for its automation potential.
The good news for the monogrammed-shirt set is that despite this upheaval among the supermarket banks, total employment in the sector is not a disaster. In fact, according to Labor Department figures, the number of people working in the U.S. financial and insurance industries this year finally climbed back above 6 million for the first time since 2008. Whether this is just a reflection of temporary mercenary soldiers hired to fight in the fintech revolution is yet to be seen.
What's clear, however, is that the Wall Street we once knew is changing rapidly and, to borrow a technical term from McKinsey, "ruthlessly." Some of us just may need to remind ourselves once in a while that this is a good thing.
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