London, 22 January 2011

Reuters: For years, U.S. investment banks made themselves at home in Europe, pushing their European counterparts into the back seat. Some U.S. bankers fear that could be about to change.

Ambitious banks in Europe are now jostling to grab a bigger share of the lucrative trading business, thanks to a ban on Wall Street rivals gambling with their own money.

The U.S. Volcker Rule restricts how firms trade with their own money for the benefit of clients, as well as for their own book. This creates an opportunity for European investment banks, which appear set to escape its reach on their home turf.

"It does depend on executing this properly, but this could be a once-in-a-generation opportunity," Douglas Landy at law firm Allen & Overy told Reuters.

Details of the new U.S. laws are still being hammered out, but proprietary trading -- which is not driven by client needs -- is firmly banned. Large Wall Street banks have responded by spinning off those operations into units at arm's length.

Market making -- in which banks use also their own capital to buy and sell securities but with an eye of creating liquid markets for customers -- is emerging as a battleground that can potentially have a big impact on business.

"European banks are going to be more aggressively moving into these areas ... and it's wrong to say it isn't happening already," said Landy, who heads the firm's U.S. financial services regulation practice.

U.S. firms will still compete in market making, but the boundaries are fuzzy and U.S. watchdogs will monitor risks much more closely than before, limiting revenues.

Trading is estimated to account for up to 80 percent of revenues in banks' key profit centers such as fixed income, currency and commodities and equity derivatives.

By contrast, "prop trading" at most banks is estimated to have made up only 1 to 2 percent of trading revenues after the financial crisis, except at firms such as Goldman Sachs.

In an extreme scenario, Goldman, Morgan Stanley, Bank of America Merrill Lynch and Citigroup could collectively take a $50 billion hit to their 2011 revenues, J.P. Morgan said in a note last week.

The fear, according to one top executive from a leading Wall Street bank in private conversation recently, is that they will lose business to big European trading houses.

These include Deutsche Bank, Barclays Capital and equity derivative market making specialists BNP Paribas and Societe Generale, while newer entrants such as Japan's Nomura also stand to gain.

European banks are just as restricted as their counterparts when operating in the United States. But that won't stop them from serving U.S. customers from afar, filling any liquidity gap that could potentially be left by the local firms.

"If you can't make markets in the U.S., so make them out of Europe," Kian Abouhossein, the lead banking analyst on the last week's JPMorgan note, told Reuters.

"If you pay people enough, they can work overnight. These are global products -- foreign exchange platforms are global, for example -- and you can run these out of Asia or Europe."

A full-on land grab will take some nerve on the part of Europe's banks. Trepidation over political scrutiny in the years it takes for the Volcker rule to fully come into force may yet keep ambitions in check.

Like their U.S. counterparts, firms such as Deutsche Bank have already shed their proprietary trading desks.

"This is where a lot of the losses were during the crisis," said Simon Adamson, banking analyst at CreditSights.

"Even if there is not a real regulatory move on this, there is pressure on (European) investment banks to demonstrate they are cutting risk."

And while European politicians have publicly pushed back the idea of a local Volcker Rule, some analysts and financial market trade bodies still believe Europe won't be far behind.

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