For all the talk of boutiques and fintechs, the banking market is more unequal than ever and the future promises more of the same​, writes Brian Caplen.

While a last-minute climbdown by the authorities on some MiFID II deadlines is welcome, it doesn’t alter the overall picture of complex and costly regulation. MiFID II is the largest and most sweeping of a whole series of regulatory overhauls to have taken place globally since the financial crisis. These have reshaped the banking market and made it difficult for anyone other than the biggest banks to survive.

In short, while the authorities may have wanted more competition, they have ended up with less as only a handful of large banks can afford the investment to keep pace with rules as well as operate with sufficient scale to make returns in a tougher environment.

This is illustrated best by looking at The Banker’s Top 1000 ranking. Back in the 2007 ranking before the crisis, Bank of America came top with $91bn of Tier 1 capital. Ten years later Bank of America is in fifth place with $190bn and ICBC comes top with $281bn, or three times as much as Bank of America needed 10 years previously.

In the past decade, the overall capital holding of the Top 1000 banks has doubled, but more significantly the top 10 banks’ share of the total has increased from 21% to 26%. Banking was always an unequal business – now it is even more so.

A recent paper by Christian Edelmann and Patrick Hunt of Oliver Wyman notes the impact on investment banks: “The gap in shareholder returns earned by the group of investment banks in the top quartile compared with the average of those in the bottom quartile has grown from 30% in 2007 to more than 100% in 2017. The average returns generated by the group of banks in the bottom quartile have fallen by two-thirds, to just 6%. The strong have gotten stronger and the laggards have had to fight harder not to fall further behind.”

The next decade will see this trend continue. Regulation has hardly slowed but now banking inequality is being driven by the use of advanced technology such as AI and robotics to reinvent the business. This may originate in fintechs and boutiques but for the most part it will need the investment dollars of the big banks to harness it on a large ​scale. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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