I would definitely have questioned the wisdom of acting as a liquidity provider to the 50-odd banks we had direct lines with, plus the many more who used to plague us non-stop on Reuters, as well as some extremely predatory clients. I distinctly remember once quoting more than 200 prices in a New York morning to counterparties. I made the right price more than 98% of the time, but the few I was hit on all immediately cost me. The money the bank spent to keep its name in the frame was monumental, but I assume that it was less than running a marketing campaign. I have no idea if this was reflected in the price HSBC paid for this once-proud bank a few years later.
Looking through the 2009 FX poll results, and talking to market participants, it would be easy to conclude that something similar is going on now. “The FX story is a compelling one. It has a high risk-adjusted return on equity, low usage of risk-weighted assets and low credit utilisation – all from an annuity-based business,” says Brad Leek, global head of financial institution FX sales at RBS.
Reto Stadelmann, global head of FX trading at UBS, makes a similar point: “In the current environment, any business with low balance sheet usage and a revenue stream that is more client driven is likely to be more attractive.”
However, to conclude that banks such as RBS and UBS are pumping FX for marketing reasons alone is wrong. While it may be important, the most telling reason is that FX is an extremely profitable business for those who get it right; it has become the perfect product, and not just for those banks that have racked up huge, balance-sheet busting losses in credit.
“FX has a great return on economic capital due to the short-dated and liquid nature of the product, minimal balance sheet consumption and the industry has worked together in minimizing systemic risk. It has fantastic risk-adjusted returns as well genuinely reflecting client needs, and as a result will see focus and continued investment,” says Zar Amrolia, global head of FX at Deutsche Bank.
As a result, as I explain in the write up of the poll results in May’s Euromoney magazine, the standing of FX within institutions has gone up. And it’s not before time.
Euromoney magazine subscribers will have access to the headline results and editorial coverage at euromoney.com, while FiX subscribers will get access to the full set of results data at euromoneyfix.com following the FX awards dinner on the evening of May 6.