Investment banks - ways to slow

High costs and feeble returns. That is the reality for investment banks in the wake of the global financial crisis. Reining in the first and lifting the second are imperative. The issue is where to cut, and how deep. Two banks display two very different responses to the conundrum. One is pausing for breath; the other is retreating homewards. Neither route really addresses their core problems.

Take Deutsche Bank. The cuts in its Asian business, where an expected equity capital markets frenzy proved shortlived, suggest an institution clinging to the hope of a cyclical recovery. Nomura's latest $1bn of cuts, mostly in Europe, suggest a more secular downturn. Its 2008 purchase of former Lehman Brothers units in Europe and Asia more than doubled its headcount; its costs were out of all proportion to performance.

Nomura's approach is less of a full-blown retreat than it looks. It is responding to structural change in markets by, for example, moving cash equities outside Japan on to its electronic trading platform. Less than half of its scaling-back is staff-related. If anything, the broker is retreating to what it does best by actually expanding its fixed income business globally, which accounts for 60 per cent of wholesale income.

Deutsche must cut for a different reason: its capital ratio is weaker than its peers' and its cost-to-income ratio is almost 80 per cent. Its €4.5bn of cost cuts - a quarter of front office and a fifth of infrastructure costs - are aimed at protecting its position as a top three investment bank. They are more a pause for breath than a sign of retrenchment.

Nomura at least recognises that it must stay closer to home, using its investment bank to service Japanese clients. The trouble for Deutsche is that, for all its global stature and ambition, the bigger risks - from eurozone banking union or capital adequacy - lie closer to home.

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