March, 17, 2010

The strength and scope of financial regulatory changes being debated around the world appear to be the biggest swing factors in gauging the profitability of the investment banks, according to a new industry research report from Oliver Wyman, a global consulting firm, and Morgan Stanley.The report projects that a moderate regulatory shift out of Wall Street’s favor would take around 4 percent off the investment banking industry’s return on equity, with a harsher 8 percent drop in return on equity projected if governments around the world begin a more punitive regulatory structure.

The current year is expected to a “pivotal” one for the investment banking industry as trading spreads narrow and competition for clients heats up, the report said. Underlying investment banking revenue will be down 10 to 15 percent from last year, according to the report’s baseline projections, partly because of the normalization of the trading markets.But the big wild card is regulation. The projected 8 percent drop in the industry’s return on equity over time in the punitive case takes into account several “draconian” changes.

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