Next time, the job cuts could be a lot worse

For the moment, Europe's shock and awe seems to be working. Following the overnight announcement of a rescue package totalling $957m, the recommencement of dollar swaps, and the ECB's apparent embrace of quantitative easing, Asian markets have rebounded.

Whether the favourable effects of shock and awe can last remains to be seen, however. Doubts are already being expressed about indebted European governments' ability to actually deliver on the promised package, and Angela Merkel's lost majority may make it even more difficult to resolve problems in future.

Things had been looking unhappy for banks with European exposure. European bank CDS widened substantially at the end of last week. Nor were Europeans the only ones at risk: banking analyst Dick Bove points out that Bank of America, Citigroup, JPMorgan, Goldman Sachs, and Morgan Stanley all have substantial exposure to the continent.

For the moment, banks are building headcount again. As the graph below shows, Goldman Sachs, Deutsche Bank, Credit Suisse, UBS and JPMorgan all increased their investment banking employees in the first quarter, and there are predictions of an additional 14,000 jobs in the City this year.

Investment banking headcount changes, 2007-2010

But in the event that spiralling government deficits and falling house prices do eventually catch up with the banking system, recent headcount additions could easily be reversed.

And next time, banks' ability to cut costs without cutting headcounts will be limited. Not only are salaries now a lot higher than they were in 2008, but as Stephen Hester pointed out last week, the high proportion of deferred compensation means banks are now less able to control compensation expenditure year-to-year. Employment in the financial services sector looks as insecure as it's ever been.