A compelling argument for why traders at Deutsche and Credit Suisse should be earning less

Whenever we calculate the notoriously unpopular average pay per head figures for employees at various investment banks, Goldman, Credit Suisse and Deutsche usually come at the top.

It now appears that Credit Suisse and Deutsche might be there by sleight of hand. This is not simply due to the way they classify their investment banking employees (although almost certainly has an impact in the case of Deutsche Bank), but because Credit and Deutsche appear to be underestimating the amount of market risk they're taking. They may be paying their traders too much as a result.

JPMorgan analysts Kian Abouhossein and Delphine Lee have analysed the trading revenues across various investment banks, compared to the market risk they claim to be taking. Deutsche and Credit Suisse are clear outliers.

At Credit Suisse, for example, Abouhossein and Lee point out that 2009 trading revenues were 1.08x the bank's reported market risk weighted assets. At Deutsche, they were 0.63x. But at Goldman Sachs and Morgan Stanley they were 0.19x and 0.16x respectively.

They conclude that:

CS and DB screen as having unusually high trading profitability relative to reported market risk, suggesting either much more profitable per unit risk taken or, more likely in our opinion, a relative understatement of market risk. On the other hand, MS and GS again appear to have higher market RWAs in relation to their trading revenues - implying, all else equal, more conservative reporting of Market RWAs..

Further proof

Source: JPMorgan

The implication (although Abouhossein and Lee don't say as much) appears to be that traders at Deutsche and Credit Suisse are probably being overpaid. These days, traders' bonuses are supposed to be tempered by riskiness and the amount of capital employed. Therefore, if riskiness is being understated, traders will be earning too much.

It may be time for people at Deutsche and Credit Suisse to take a pay cut (or for traders at Goldman and Morgan Stanley to get a rise).