Why You Should Be Happy That Bank of America’s Trading Revenues Are Down


Source: Flickr / Anne Worner.

Bank of America (NYSE: BAC  ) posted a 15% drop in trading revenues (excluding a one-time charge from 2013), and I for one am happy about this news.

While fixed income, currency, and commodities trading (or FICC) has been a major revenue engine for banks over the past two decades, it has not been good for banking or the financial industry as a whole. Thus, a change to the structure of banking that involves less FICC would be a good change in my book.

What is FICC again?
FICC involves trading in both assets and derivatives, so it covers quite a lot of, well, trades. Over the past 20 years it became an increasingly significant source of income for large banks, and recent activity has remained relatively strong, depsite the recent decline.

The problem with FICC lies both its volatility (of all bank activities, trading is easily the least predictable) and in the short-term focus it encourages. While banks can make enormous profits on trading one day, the overall trend is that it produces worse average returns for banks in the long run.  

FICC is attractive not for its long-term contribution to the growth of a bank, but for the breathtaking possibilities of a major win right now. As for the potential for disaster, one need only look at the financial crisis (remember Bear Stearns?). For a more recent example of the downsides, consider the London Whale and his $6 billion loss... in one day. 

FICC today
Bank of America is in good company for its poor first quarter. Citigroup's first quarter FICC revenue fell 18%, and JPMorgan's fell 21%. Even Goldman Sachs, which illustrated its long-standing passion for trading by appointing a former trader as its CEO in 2006, posted a 13% drop in FICC.

Why are things so glum? There are several factors. In the past few years, rule changes came down with the specific intent of curbing trading activities, most notably a restriction (in the U.S.) on banks trading for their own accounts. By outlawing this practice, banks can only profit off the success and failure of their customers, which I think we can agree is pretty reasonable.

There are other significant pressures on the FICC business. Stronger capital requirements have encouraged banks to shift assets and hold more in reserve, and the recent scandals in forex and Libor may have further cooled the market. More recently, very low volatility in the markets has simply made trading less profitable and thus less attractive to clients.

All in all, it's gotten to the point where the Financial Times is asking if we're about to see a resurgence in traditional investment banking. 

What happens next
It is of course entirely possible that the recent lull in FICC is temporary. More changes are coming, however: According to the Fed, capital requirements will not be getting any looser, and there is discussion among regulators about moving derivative trading activities onto electronic exchanges that would further reduce margins trading.

All that being said, I'm happy that trading revenues are down. May they continue their downward spiral. Maybe it will inspire a change in resource allocation to, well, banking. 

Either way, Bank of America is still facing a lot of headwinds in the form of regulatory and legal action, so things are not going to be easy anytime soon no matter how much trading it does. Still, I would love to see the bank's executives take a deep breath and shift resources back to the basics of being a good commercial bank instead of chasing returns and volatility. We've seen banks rise and fall from FICC; today, the real sex appeal would come through being just a bit more boring.

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