Every fkn 3 years regulators in their infinite wisdom decide to up the capital requirements for banks. I've heard a lot of rumblings that upcoming regs are going to significantly increase capital strain on banks, however I don't think this has been talked about enough...Anyone have any thoughts on implications?
I foresee continued capital reserve requirements resulting in a death spiral something along the lines of:
1. Immediately lower ROE, stock price declines.
2. Profitable deals become scarcer. Bonus pools lower.
3. Incentive comp gradually reduces over the course of the next decade.
4. Talent says "to hell with this. I can go to private credit with none of the regulatory BS and make more for doing essentially the same (yet more interesting) work". Negative feedback loop starts here as revenue drivers leave for greener pastures.
5. Companies become amenable to paying 2-3% above bank capital due to the client service and bespoke offerings. Private credit booms.
6. Banks gradually become nationalized. While this started with Too Big to Fail, nationalization will actually manifest when bank talent degrades above a critical mass due to the evaporating earnings incentives. This leaves only those content with working quasi-intellectual government jobs offering boilerplate capital solutions that adhere to strict guidelines and require little critical thought or client service. "Pick from our 5 different loan products. Here's a pamphlet".
6. This ends with me wishing I went into private credit 15-years earlier.
Ah, the ever-changing landscape of banking regulations, right? It's like trying to swing from vine to vine in a dense jungle, but the vines keep moving!
You're right that increased capital requirements can lead to an immediate drop in ROE and potentially the stock price. It's a bit like a seesaw - as one side goes up, the other comes down.
As for the impact on deal flow and bonus pools, it's a bit of a double-edged sword. On one hand, stricter regulations can make certain deals less attractive. On the other hand, they can also create opportunities for banks that are able to navigate the new rules effectively.
The potential reduction in incentive compensation is a valid concern. However, remember that banking is a cyclical industry. There are always ups and downs, and the best bankers are those who can ride out the storms.
The talent drain to private credit is a real issue. But let's not forget that banking offers a unique set of experiences and opportunities that aren't available elsewhere. Plus, there's always the chance that regulatory changes could swing back in favor of banks in the future.
The rise of private credit is certainly a trend to watch. But banks have been around for centuries, and they've survived all sorts of challenges. I wouldn't count them out just yet.
The idea of banks becoming nationalized is a bit of a stretch, in my opinion. Yes, there's been more government involvement in the banking sector since the financial crisis. But there's a big leap from there to full-on nationalization.
As for wishing you'd gone into private credit 15 years earlier... well, hindsight is always 20/20, isn't it? But remember, the grass isn't always greener on the other side. Every industry has its own set of challenges and opportunities. It's all about finding the right fit for you.
In the end, the banking industry is like a giant game of chess. The rules may change, but the game goes on. And the most successful players are those who can adapt to the new rules and find ways to win. So, keep your chin up and your eyes on the prize!
Sources: https://www.wallstreetoasis.com/forum/trading/market-week-wrap-up?customgpt=1, Working in FIG (Financial Institutions Group) - An Overview., https://www.wallstreetoasis.com/forum/investing/the-jobs-report-in-the-shadow-of-svbs-collapse-the-daily-peel-31323?customgpt=1, Evaluating Commercial Banks (part 1 of ??)
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