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Wall Street Banks Need a New Business Model

September 14, 2016

Traders On The Floor Of The NYSE As FOMC Announces Rate DecisionTraders On The Floor Of The NYSE As FOMC Announces Rate Decision
The New York Stock Exchange (NYSE) on Wall Street in New York CityPhotograph by Michael Nagle—Bloomberg via Getty Images

Despite slashing billions in costs and retrenching from key businesses since the financial crisis, Wall Street banks still have not done enough to repair and restructure, according to a new report.

McKinsey & Co on Wednesday released an annual report about banks, saying Wall Street firms continue to suffer from weak profits, high costs, and strategic uncertainty.

The report expressed frustration with the lack of progress the firm’s banking clients have shown.

“The inescapable reality is that the industry’s restructuring efforts to date have failed to produce sustainable performance,” the report said. “A more fundamental change is required, based on the realization that for most banks, the traditional model of global capital markets and investment banking is no longer an option.”

The top 10 global banks in particular are struggling to adapt to the post-financial crisis environment, as they grapple with high operating costs, low interest rates and the key fixed income trading business under revenue pressure.


These firms posted a combined return on equity of 7% in 2015, below the 10% minimum that analysts typically expect banks to make to meet their cost of capital.

Capital market and investment banking revenues have declined for the top 10 banks since 2012 by 10% to $144 billion. These firms have lost share to regional and local banks, which have seen their revenue rise 14% over the same time period.

To boost their returns, McKinsey said banks should consider a range of options including selling their products individually to clients rather than as a package of bundled services; better allocating their balance sheets to generate more profit; utilizing digital technology and robotics; participating in industry utilities that can help cut costs; and addressing risk and conduct among bank employees.

The report pointed to a number of industries outside banking that have successfully restructured, including telecommunications, semiconductors, and automobiles.

“The road to a sustainable future remains open…but only if they make tough choices and bold actions now,” the report concluded.