On managing through the downturn
'We have taken a disciplined approach to expenses and capital management to ensure that the firm is positioned to benefit when a stronger operating environment returns. However, to generate stronger returns during the upturn, we have to support and invest in our client franchise during the downturn. Getting this balance right translates into outperformance over the cycle'.
On impact of regulatory reform
'Regulatory reform should promote greater price transparency, automation, and use of central clearing, which we believe will benefit market participants. And, regulation should bring greater efficiency from standardization. Common standards make it possible to realize operational efficiencies, which means we can grow the volume of our business without significantly increasing costs'.
'Greater use of centralized clearing also means equalizing credit terms, which provides more opportunities to compete on intellectual content, responsiveness, execution, and price -- not just solely on the ease of extending credit'.
On opportunities in Europe
'In more developed markets across Europe, we see an important opportunity for the firm as European debt markets become increasingly active. In leverage finance, for instance, 57% of the issuance since 2010 are bonds -- compared to just 15% pre-crisis.
We expect that higher capital requirements will mean less bank lending and more bond issuance. This will drive higher new issuance volumes and secondary trading activity'.
On capital efficiency
'As part of addressing both near and longer term realities, we also are focused on operating more efficiently under new capital requirements.
'Basel 3 will significantly impact the amount of capital attributed to certain businesses. While we are still waiting for greater clarity, we are aggressively managing our risk-adjusted capital levels.
'We have a long track record of allocating capital and other scarce resources based on risk-adjusted returns. We allocate funding and liquidity costs to individual businesses to understand the fully-loaded return dynamics. We have provided greater balance sheet and resources to higher return businesses, while downsizing or eliminating lower return businesses'.
On size and complexity
'The increase in the cost of capital has been joined by a corresponding rise in the cost of an institution’s scale.
'For more than a decade, larger size and complexity were viewed entirely as synergistic and virtuous. However, Basel 3 introduces a series of capital surcharges associated with size and complexity that will effectively raise the barriers to entry in some businesses, and force some institutions to be more disciplined about their resource allocation. Although we have significant scale in each of our businesses, many of our investment banking competitors also have sizeable commercial and consumer businesses.
'On November 1st, the Financial Stability Board proposed capital surcharges to the world’s largest financial institutions. Any synergy from housing multiple businesses together must be weighed against the requirements for more capital and liquidity. For the first time, it’s clear that size and complexity come with a higher cost'