The major broker-dealers are focusing on the wrong target by pressing stock exchanges, CSDs and CCPs to cut their costs. The most waste in securities trading, clearing and settlement is incurred through indirect costs such as IT development, auditing, tax compliance, marketing and public relations, which could account for as much as 85 per cent of total costs – and which tend to show up not at the level of the business division but at the level of the banking group as a whole. Or so claims a new study of 52 international investment banks by German consultants Droege, reported in the Financial Times today.
In equity trading, Droege puts the cost-income ratio at an average of 69 per cent, while in fixed income, foreign exchange and money market operations it averaged 38 per cent. The consultancy says the best performers, which have succeeded in spreading costs across business lines, were achieving indirect cost-income ratios of 15 per cent. Indirect costs per front office employee ranged between 50,000 and 570,000 ($63,000-$722,000). Droege says banks in Europe are aiming at indirect costs per employee of no more than 50,000 to 80,000.
The Droege study breaks indirect costs down into 22 separate areas. It suggests the problem is particularly acute in European banks, as opposed to UK banks.