Investment banks' new political battleground: cost allocation
As banks everywhere look to squeeze costs in a market where revenues are at a 13-year low, insiders say battles are being fought internally about how costs are ascribed, both between divisions and regions.
Sources at Credit Suisse, Deutsche Bank and Nomura say cost allocation plays an important role in decisions about where to cut, and that allocations can be made for political as much as pragmatic reasons. Costs can relate both to charges for central resources and to funding costs attributed to each business.
At Nomura, for example, there are claims that the London office historically carried the costs (allegedly unfairly) for much of the international (ex-Japan) business, and that this made it look less profitable than was in fact the case. The most recent accounts for Nomura International PLC in the UK, for the year ending March 2019, show the bank making a loss of $384m for the year thanks to high administrative charges of $1.6bn. Nomura declined to comment.
At Credit Suisse, there are complaints in the global markets business that the private bank is given preferential treatment when it comes to central cost allocation and funding charges. "The high funding costs are allocated down to the investment bank and make the markets business seem unviable," complains one marktes insider. "The private bank gets to lend to clients at much more lenient return on equity metrics. The investment bank is effectively subsidising the private bank," he suggests. Credit Suisse declined to comment on the gripes.
Similarly whinging seems to have been present in Deutsche's now defunct equities business. One former Deutsche Banker suggested here earlier this week that funding costs for the business were understated to help flatter traders and keep the business afloat. And when ex-head of equities Peter Selman gave a pep talk to staff in New York March, he said centralized costs had been unfairly allocated to the equities business and that this was being remedied (seemingly to no effect, given that equities was shut down four months later anyway).
The complex Fundamental Review of the Trading Book (FRTB) legislation being introduced in 2022 promises to significantly tighten banks' room for manoevre in calculating funding costs by business, but squabbling is likely to persist over the allocation of central administrative resources.
Sources say disputes could worsen in EMEA as banks' EU offices become fully functional. EU-based offices, for example, are allegedly being given trading books requiring limited funding while London gets stuck with high-cost 'toxic' products that are harder to shift. "It's like London has become the bad bank and the EU office has a clean sheet," says one managing director.
European disputes about funding and costs are likely to be accompanied by new squabbles about the allocation of the sales credits which determine how markets professionals get paid. Disputes over sales credits were a big issue in the early days of Barclays and Lehman, with salespeople on either side of the Atlantic claiming ownership of clients. One Credit Suisse insider says there's already an issue between Europe and Asia because the Asian office accounts for its credits separately and there's no 'unified sales credit accounting system.' Once European trading floors at each bank are split between London and the EU, sales credit allocation everywhere will become far more of a headache than it is now.
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Have a confidential story, tip, or comment you’d like to share? Contact: sbutcher@efinancialcareers.com in the first instance. Whatsapp/Signal/Telegram also available.
Bear with us if you leave a comment at the bottom of this article: all our comments are moderated by human beings. Sometimes these humans might be asleep, or away from their desks, so it may take a while for your comment to appear. Eventually it will – unless it’s offensive or libelous (in which case it won’t.)
