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Investment Banks brace themselves

The financial crisis of 2008-09 has prompted a wave of banking reform. A report from McKinsey & Co notes that massive new regulatory packages have been agreed in Europe and the United States, and regulators and bankers are now rolling up their sleeves to prepare for implementation. Banking leaders are keen to understand the complexities of proposed reforms and their impact, especially on their investment banks.

McKinsey research on the 13 largest global investment banks finds that they will be materially affected. The firm estimates that the postcrisis average return on equity (ROE) of about 20 percent will be reduced to about 7 percent. Banks can take steps to restore some returns, but these will only push ROE up to about 12 to 14 percent. At that level, ROE will be only just above cost of capital, and well below the level that investors have traditionally demanded as compensation for the volatility of capital-markets businesses.

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