European financial markets' revamp to cost its banks US$4.4b a year: report

The new rules are aimed at making European markets more transparent and provide better value for investors.
The new rules are aimed at making European markets more transparent and provide better value for investors. PHOTO: BLOOMBERG

LONDON (REUTERS) - A wide-ranging reform of European financial markets called MiFID II will cost European investment banks around 2.6 per cent of annual revenues, equating to US$4.4 billion a year, according to industry analytics firm Coalition.

The new rules set to come into force on Jan 3 are aimed at making European markets more transparent and provide better value for investors, but are expected to drive down banks' profits as a result.

Coalition said in a report, based on banks' internal estimates of the effects of MiFID II on more than 25 investment banking products, that its findings suggested banks will be able to cope with the hit to profits.

"Everyone has been painting a very negative picture, MiFID II will of course disrupt the industry but our report suggests the impact will be manageable," said Eric Li, research director at Coalition.

The drop in industry revenues will happen over 12 to 24 months, Mr Li said, as banks gradually determine what the new market price should be for products such as equity trading and research or advice for companies on mergers and fundraising.

Banks have over the last 18 months or so scrambled to work out how they will price such services under the new regime.

The biggest impact is likely to be on one of the least-heralded parts of banking, Mr Li said - namely securities services, a broad field that encompasses banks' provision of services to asset managers such as custody and fund administration.

While the industry has so far mainly focused on how MiFID II will hit revenues in cash equities businesses, Coalition said that will account for just 0.4 percentage point of the overall 2.6 per cent decline.

The category of 'banking' products, which includes securities services, will account for 1.1 percentage point of the 2.6 per cent total decline in revenues, Coalition said.

"The elephant in the room is securities services, because asset managers' profit margins will be hit and there will be collateral damage for the whole chain in financial services as they pass that on," Mr Li said.

Asset managers tend to pay banks a packaged fee for all securities services products, and are likely to negotiate cuts in those fees as the new rules take effect, Mr Li said.