If a week is a long time in politics, a decade is a lifetime in the financial markets. Given the scale of the backlash against the banking industry since the financial crisis, the relentless drip feed of scandal, and the barrage of new regulations – you might have expected that the industry had been transformed over the past 10 years.
But instead it’s surprising how little has changed in the banking and finance industry over the past decade, rather than how much.
In a recent report, the think tank New Financial looked at what has and hasn’t changed across more than 20 sectors of the industry by analysing hundreds of metrics in 2006 and 2016. The conclusion? With a few notable exceptions, the financial industry today looks remarkably similar to the financial industry that played a big role in causing the financial crisis 10 years ago.
Let’s start with banks. It turns out that far from being ‘too big to fail’ 10 years ago, they were perhaps ‘too big to shrink’. The global banking industry is nearly a third bigger today than on the eve of the financial crisis once you adjust for inflation. The biggest banks in the world have been particularly resistant: just two of the 100 largest banks in the world are smaller today than a decade ago, and two thirds of the banks in the top 100 in 2006 are still in the top 100 today.
Banks are much less profitable – profits at European banks have fallen by two thirds – and they are safer, with roughly twice as much capital as before. But you would be hard pressed to say they had been transformed.
On the other hand, investment banks (banks that advise companies on big deals and make most of their money from trading in financial markets) have been the whipping boys of the crisis. Their revenues have dropped by a third and profits have nearly halved in real terms, while their profitability has collapsed. Spare a thought for the bankers and traders who work for them: average pay has fallen by more than 40pc in real terms over the past decade to just £160,000 or so.
The fund managers who look after your pension have fared much better. With stockmarkets propped up by central banks and low interest rates, global assets under management have grown by more than a quarter over the past decade. But the economics of the industry have hardly changed, and fund management firms are only marginally less profitable than they were 10 years ago. This sort of resilience has been good for shareholders in asset management firms and for the staff that work at them, but has recently caught the attention of regulators.
Perhaps the biggest change over the past decade has been the shift from Europe to Asia. Europe’s market share has fallen in 20 out of 21 of the sectors in the report, while Asia’s share has grown rapidly. For example, European banks used to represent nearly 60pc of the size of the global banking industry, but today account for just a third of it. Meanwhile, four of the five largest banks in the world today are Chinese. A decade ago, just one Chinese bank made it into the bottom of the top 20.
It’s also clear that there has been a huge shift among investors from equities (‘the stockmarket’) to bonds. Stockmarkets have shrunk relative to the size of the economy in every region of the world outside the US, but the corporate and government bond markets have increased in size by about two thirds once you adjust for inflation. In the UK, a third of your pension was invested in the UK stockmarket in 2006: today it’s just 16pc.
This shift is also display in how companies raise money: the value of new companies floating on stock exchanges has halved over the past decade in real terms, while the value of companies raising money in the corporate bond market has more than doubled.
Meanwhile, the amount of trading in financial markets has continued its relentless rise. Trading volumes on stockmarkets and bond markets has increased by a quarter relative to the size of global economy. In the foreign exchange and derivatives markets – which have been the focus of most of the scandals over the past decade – the numbers are even more mind boggling than before. Each day more than $6.5 trillion is traded in the foreign exchange market (most of it in London) and $3 trillion changes hands in the derivatives market. That means that FX trading volumes have grown from 19 times the size of the global economy in 2006 to 22 times last year.
The other main area to have flourished since the crisis is the world of so-called alternative assets, mainly hedge funds and private equity. As regulation has increased for banks and companies listed on stockmarkets, money has poured into the sector: their assets under management have more than doubled over the past decade, but their high fee structures (of roughly 2pc a year as a management fee and a 20pc share of performance) have proved remarkably stubborn. Their performance less so: on average its halved over the past decade.
And what have regulators been doing over the past 10 years? Apart from fining banks more than $375bn for misconduct they have been busy redesigning the international regulatory system: more than 30 new regulators have bene set up in the US and Europe alone over the past decade. Their budgets have increased by a third in real terms and staff numbers are up by 40pc.
So there you have it: after a decade in which the world economy has been scarred by the financial crisis, the financial industry has emerged with little more than a few scratches and bruises (and the odd broken bone at investment banks). Perhaps another financial crisis might change that. But then again, perhaps not.
William Wright is the managing director of capital markets think tank New Financial