How many little pieces of conventional wisdom never hold up to scrutiny? Things get repeated over and over until they are so common that no one ever stops and thinks about them. It isn’t really nefarious like the Big Lie, more just shorthand that may have made perfect sense at one time but has become anachronistically handicapped as the world changes and changes again.
One prime example is that banks can’t make money without volatility; at least in the shadow version of a bank. A real depository institution needs nothing of the sort, of course, preferring instead its opposite. But the modern dealer bank has blended into the traditional so that the blurred distinctions have left behind the rhetoric about how one works. What a dealer is today is nothing like what one may have been long ago when this idea first manifested.
JP Morgan, for example, put up dismal numbers for Q1 2016. That wasn’t at all unusual, as all the shadow banks did. Despite massive volatility in all markets, even stocks, there wasn’t a marginal FICC nickel to be found on the Street.
“We expect investment banking revenues to be weak this quarter, mainly due to continued market volatility that froze capital markets activity—particularly in equity capital markets (ECM) where initial public offering (IPO) volumes declined more than 67% year-over-year (Y/Y),” [Frederick] Cannon [of KBW Securities] said.
In fact, JPM’s Corporate & Investment Banking (CIB) segment posted revenues of just $8.13 billion for the quarter compared to $9.58 billion in Q1 2015 (-15.1%). Volatility can mean different things, of course, but what most people mean in this context is that market spreads rise during market events making it more profitable for dealers to be dealers. The idea of such a matched book paradigm is an academic one, not fit for how banks actually operate.
So it is now after a brief rebound and “reflation” that banks like JPM are for the middle of 2017 warning about their results again. Speaking at an industry conference today, CEO Jamie Dimon predicted that trading results would be down 20% year-over-year following what was already a bad quarter in Q2.
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