Wall Street Banks Thrive Amidst Conflict
The geopolitical turmoil arising from the Iran war has driven trading activity, leading to major US banks posting record first quarter earnings.
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The geopolitical turmoil arising from the Iran war has driven trading activity, leading to major US banks posting record first quarter earnings. JPMorgan Chase reported its highest ever trading revenues at over $10 billion, with Citigroup similarly achieving its best quarterly revenue in a decade.
Together, these major US banks have raked in billions of dollars in profit during the first quarter of this year alone. JPMorgan Chase’s Chief Financial Officer, Jeremy Barnum, notes that the banks have been benefitting from ‘good volatility’ during this period.
Investment banks flourish with market volatility because their business model depends upon facilitating client activity. And it is during these periods of volatility that clients will want to balance their exposure to certain assets and execute trades quickly. The banks then earn fees on every transaction, so higher trading volumes directly boost revenues for them regardless of whether the markets then move up or down.
Jeremy Barnum bringing up ‘good volatility’ distinguishes the current situation against markets that are so chaotic that cash flow evaporates as clients choose not to trade due to unreliability. This would then collapse transaction volumes for banks, preventing them from collecting on fees. The Iran war is allowing for these clients to actively trade with sustained cash flow and so the banks are able to competitively play a part.
What does this mean for capital markets?
- Investment banks gain significant revenue opportunities during geopolitical crises through heightened trading activity
- Banks that have chosen to restructure their offerings with a greater focus on investment banking, like Citigroup, are seeing these turnarounds pay off rather quickly
- Whilst banks are winning today, they may lose tomorrow if clients begin to default on loans throughout this renewed crisis
How to use this in applications
Record bank earnings will mean substantial increases in the bonus pool for employees of these banks, and so law firms will have to advise the European operations of these investment banks on executive compensation structures that comply with UK and EU regulations on bonuses. This might mean deferring compensation by using stocks over a number of years and structuring attractive packages for senior traders to prevent them from being poached.
Corporate restructurings like that of Citigroup, or alternatively US banks choosing to exit non-core European markets, will require law firms to advise on these business disposals and on the regulatory approvals required by the Prudential Regulation Authority or the Financial Conduct Authority to transfer banking licenses.
Banking and finance teams at law firms will have to advise on a variety of credit facilities that European clients are seeking to expand on in light of these strong credit conditions. This may involve structured syndicate lending or leveraged finance.
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