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How quantitative easing will feed your bonus - or not

It's happening again. The Bank of England is re-engaging in quantitative easing. 75bn is being injected, starting next week. Analysts at Citigroup are predicting the final injection could be closer to 500bn.

The last time big QE happened in the UK was around two years ago. Starting in March 2009 and ending in early 2010, the Bank of England bought 200bn of gilts. Meanwhile, the Federal Reserve's last big bout of quantitative easing began with a $600bn Treasury bond buying programme from October 2010. This came to an end last June.

As we have noted before, QE can be a good thing for investment banking revenues, and by extension, investment banking jobs and investment banking pay. Meanwhile, and not entirely coincidentally, the end of quantitative easing has been met with a sad and substantial reduction in banks' sales and trading revenues and the likelihood of massive job and pay cuts.

So will this new round of QE ease the pain?

How QE could help

QE could be of assistance to your job and pay prospects in several ways.

1) It will increase gilt trading

In the first place, QE will be good for the gilt desks that intermediate the 75bn of government bond purchases.

"QE effectively happens through us," says a senior economist at one UK bank. "We act as a market maker in the gilt markets and this will mean a lot more trading activity."

2) It will increase equity prices

By driving down the yield on gilts and encouraging investors to look for returns elsewhere, QE drives up equity markets. Hence, yesterday the FTSE rose 3.7% on the news that it was happening.

Rising equity markets are generally a good thing for banking revenues. As Becking analyst Dirk Hoffman-Becking noted last year, historically banking revenues have been 90% correlated with the S&P 500.

Rising equity markets may also feed through to increased primary issuance, which may feed through to increased equity capital markets work for banks, which may feed through to higher revenues, which may mean fewer ECM bankers lose their jobs than looks likely at the moment.

3) It will increase corporate debt purchases

The same reasoning that suggests investors will sell their gilts at high prices and reinvest in equities, suggests they might start buying corporate bonds, thereby increasing credit trading and encouraging debt issuance.

"Initially you have the trading business associated with the specific quantitative easing transactions," says the economist. "And then you have the knock on effects - the money from QE ends up being recycled into wholesale markets in other forms, such as primary bond issues."

4) It will increase liquidity and raise risk appetite

"All banks are suffering from the tightness of the credit markets," says one UK banking analysts. "To the extent that QE alleviates that, they are going to benefit."

Why QE will make absolutely no difference whatsoever

On the other hand, seen in the context of the European crisis and alleged need for a multi-trillion bailout fund to stabilise the situation, QE is a mere wart plaster on a head wound.

"This is a stop gap measure that the UK has employed to help the inter-bank market and buy time for any resolution to the European problem that's coming down the pipes," says Simon Maughan, co-head of European equities at MF Global. "I don't see it stimulating trading revenues on its own."

Will it increase bonuses maybe?

Probably not.

"It's laughable to think that this would help your bonus this year," says Maughan. "All it does it to highlight the fact that things are dreadful and you won't be getting one."

AUTHORSarah Butcher Global Editor
  • An
    10 October 2011

    I genuinely think you have missed the serious issues that lie at the heart of quantitive easing and your positives are incredibly theoretical.

    We are in a deflationary economy that has been accelerated from Central Bank intervention. One must understand this before they comment on the effect of QE

  • La
    Lay person
    9 October 2011

    With BoE buying up all this debt surely it means government debt is effectively reduced?

  • Wh
    Whiz Khalifa
    7 October 2011 least she's creative..and it was an interesting read..

    Just av a Butcher' if u dnt like one..

    u know what it izzzzzzzzzz...

    the bankers scared of it, but dem pro's aint

  • Sa
    Sarah, Editor, eFinancialCaree
    7 October 2011

    @dingdong - this is not pretending to be a deep analysis of the effects of QE on revenues. However, it is fair to say that QE drives up equity prices and that equity prices have historically been correlated to banking revenues. Yes, the points made are simple ones. This does not mean they're not worth making.

  • di
    7 October 2011


    what kind of qualifications do you have that enables you to write this?

    Just looking at the title I thought thats really stupid and then I clicked on the article and I saw your name....

    it takes a lot to analyse the economic effect of QE, it is not something easy to understand and linking bank bonuses to QE is just silly....Please think twice before writing articles on stuff you dont understand

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