How much has investment banking really changed?

The New York Times declared "the end of an era" on September 21, 2008, when, in the midst of a financial crisis, venerable investment banks Goldman Sachs and Morgan Stanley converted to bank holding companies.

The crisis shook up the industry, and the ensuing years have brought a number of new regulations and requirements. The most prominent response in the U.S. has been the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act is not popular on Wall Street, with some predicting it will dramatically harm the industry, favoring European banks able to skirt the new rules. But increased capital requirements resulting from the Basel III round of global banking standards have many European banks worried as well. New ways to measure risk-weighted assets could force banks with robust investment banking divisions to increase their capital holdings dramatically.

How do things look at the moment? The most recent round of quarterly reporting brought generally positive news from the sector. Goldman Sachs, one of the banks seen as most vulnerable to the Volker Rule, a section of Dodd-Frank that limits the "proprietary trading" banks can carry out with depositors' money, beat expectations with its April earnings announcement, with the investment banking unit showing strong revenues. Investment banking also spurred Credit Suisse to higher earnings than 2012. And Barclays, which acquired the remains of Lehman Brothers after its 2008 bankruptcy, is looking to actually expand its U.S. investment banking unit, seeing it as a better bet for continued growth than banking back in Europe, which is struggling under the weight of its own regulations and the continuing threat of financial crisis.

However, recent reports from J.P. Morgan and Morgan Stanley paint a gloomy picture moving forward. According to analysts at J.P. Morgan, global investment banking should bring weak returns for the rest of the decade. The Morgan Stanley report, written with Oliver Wyman, is less bleak; it can be summed up as, "European banks are struggling. U.S. banks are struggling far less."

Recently Fred Terrell '82, vice chairman for investment banking at Credit Suisse, sat down for an interview on the state of the industry. He sees a sector weighed down by uncertainty and new regulations, but one where there are still plenty of opportunities for well-run banks and where investment bankers have an important role to play. "I don't think the process has changed that much. But I think, because of the uncertainty over the last several years, the consequences for getting it wrong have," he said.