Wednesday's Headlines: Researchers Say Top banks' ROE will slump due to regulation

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Return on equity at top banks will drop by two-thirds unless they find a way to recoup the costs of tighter regulation, according to a new research from McKinsey, eFinancialCareers reports.

The world's 13 largest banks posted average ROE of around 20% in 2010, McKinsey says. Basel III's more stringent capital and liquidity requirements will likely push ROE down to 7%. Banks that work to counter the decline, in part by passing the cost on to consumers, can push ROE back to 11-12% initially and up to 12-14% in coming years.

"Even this level is still well below the 20% or more banks were chalking up in the heady days before the financial crisis and above what some banks still forecast," says the McKinsey report. "Rebuilding returns will involve a full menu of immediate actions in four areas: improving risk and capital models, raising the bar for data quality, improving financial and operational efficiencies."

Not surprisingly, the spectre of further job cuts has been raised: "Especially for businesses with crisis- or regulation-induced declines in volumes and revenues, banks can adjust resources in both front- and back-office functions."

It's also called for a more wide-ranging revision of compensation practices, saying (a little vaguely) that "risk-adjusted compensation sets the right incentives and compensates to some extent for increased capital costs", but concedes that the need to hold on to talent could be a stumbling block.

Other News:

SEC whistleblower Markopolos accuses Bank of New York Mellon, State Street of deceptive forex practices. [Financial Times]

Bank of America plans to exit correspondent mortgages business as it focuses on core strengths. [Wall Street Journal]

US Bancorp sues Bank of America for allegedly violating $1.75 billion loans contract. [Reuters]

Barclays CFO says bank liquidity, funding, capital "rock solid" despite recent turmoil. [Dow Jones Newswires]

Wall Street firms' donations to charities still low despite banks' recovery. [DealBook]

Bank of America adds 40 mid-Atlantic Merrill Edge financial solutions advisors. [On Wall Street]

Insider trading trial begins for Ex-Primary Global Research's James Fleishman. [Financial Times]

Citadel wins restraining order against employee accused of stealing data. [New York Times]

Bank of America ABS lawsuit by BNP Paribas and Deutsche Bank dismissed. [Bloomberg]

Wells Fargo in Twin Cities adds 90 mortgage bankers to meet refinancing demand. [Biz Journals]

Bank of America's $8.5 billion mortgage settlement challenged by homeowner lawsuits.


Wells Fargo increases commercial and real estate lending while competitors draw back.

[Wall Street Journal]