The glory days of the capital markets business are over. Since 2009, banks' returns have fallen in this segment worldwide by 28 percent to currently 227 billion US dollars. The situation has stabilized in the last three years, but this former master discipline is a long way off from the earnings levels seen before the global financial crisis. What's more: In the first months of 2016, an accumulation of signs suggested that the downslide could gather pace once again.

The continuing downswing can be attributed to a number of factors. Besides tighter regulation, these include the low underlying interest rates, changes in customer behavior, the new digital technologies and competition. The business model itself is also changing – away from risk transformation and trade in risks towards a less central function in which banks act as information procurers and market openers.

Marked decline in return on equity

As a result of tighter regulation worldwide, banks' return on equity (ROE) has narrowed, in some cases drastically, in what was once a highly-profitable capital markets business. In some product groups, the return on equity has fallen to less than 5 percent, way below the cost of equity, as revealed in the Bain analysis. If no appropriate countermeasures are adopted, the return on equity for currencies will decline from 10-15 percent to 4-7 percent and for commodities from 15-20 percent to 5-7 percent. This contraction in returns is a consequence of the higher capitalization requirements and liquidity coverage ratios, lower debt ratios and restrictions applying to short-term refinancing.

Five steps to counter the plunge in returns

The dwindling market and continuously tighter regulation are compelling banks to act. In its study, Bain has identified five steps to achieve higher profitability:

1. Strategic focus.
2. Radical simplification and improvement of efficiency.
3. Realignment of organization, recruiting and compensation. 
4. Effective resources management. Partner networking.