The world's leading global investment banks have trimmed their exposure to capital markets risk in the wake of the financial crisis, according to a new report from credit rating agency Moody's Investors Service.
The Moody's report examines the state of the leading global investment banks (GIBs) including Royal Bank of Canada, JPMorgan Chase & Co., Citigroup Inc., and Goldman Sachs Group, Inc., Credit Suisse Group AG, Deutsche Bank AG, and UBS Group AG, among others.
These GIBs have sizeable cross-border underwriting and market-making operations, which also bring added risks, the report says; including, "opaque, rapidly changing risk profiles, periodic concentrated positions, extensive reliance on less stable wholesale funding, and confidence-sensitive customer bases."
If these risks are mismanaged, these firms can face a faster deterioration in credit quality than most other financial institutions, the report notes. At the same time, they are also exposed to a variety capital market risks, including possible threats to revenues, derivatives exposure, and cross-jurisdictional and financial system liabilities, among others.
Most of these firms have experienced a reduction in their risk profiles since the global financial crisis, "as new regulation has made it more capital intensive and expensive to warehouse risk," the Moody's report says.
"Many firms have reassessed their strategies following massive credit, market and operational losses during and after the global financial crisis. Tightened regulation has also impelled firms to rationalize their global footprints, exit certain activities and reduce their appetite for risk," says Peter Nerby, senior vice president, Moody's, in a statement.
The report also notes that, while there is no metric for ambition, it's an important consideration in assessing risk at these firms.
"We believe that the reputational and regulatory fallout of the global financial crisis has dampened managers' ambition to build or expand global capital markets capabilities — for the time being," adds Nerby.