Banks, at least, are making money from a turbulent world

Or at least that is how it was a couple of decades ago, in the good old days. Following the global financial crisis of 2007-09, life sapped from the trading floor. Stringent new rules curbed profits. High-frequency traders ate banks’ lunches, especially in stockmarkets. For its part, the global economy was in a stupor, having been tranquillised by low interest rates. Markets moved linearly, with equities drifting up and bond yields slipping down. There were fireworks—the Brexit vote or the election of Donald Trump—but they were rare. This placid world provided investors with little reason to trade in and out of positions. Revenues were slim; returns sagged. Drama on trading floors featured lay-offs, rather than market moves.

At long last, however, the good old days appear to have returned. Revenues from trading desks at Goldman Sachs, JPMorgan Chase and Morgan Stanley, three giant banks, leapt by around 40% between 2019 and 2020—and have remained at or above that level since. For much of the 2010s global markets businesses barely returned their cost of capital. Now they post double-digit returns on equity. At Goldman, traders churned out a whopping 18% return on average common equity in the first quarter of 2024. At Morgan Stanley they posted 15%.

Until recently, bankers hemmed and hawed about this bonanza. Was it too good to be true? Mediocre returns had endured for such a long time that they had grown cautious about extrapolating from a good quarter, or even a good year. Of course, 2020, a banner year, was an aberration, the logic went—there was hardly going to be another pandemic. Then 2021 was just as good. On earnings calls in early 2022 bank bosses were cautious. “None of us could have anticipated the environment that we have lived through over the last two years," said David Solomon of Goldman. “We in no way see that as a permanent environment that is going to continue at this pace." Jeremy Barnum of JPMorgan talked of “normalisation", followed by “modest growth". But the chaos of 2022 was just as good for trading and markets did not slow down in 2023. Stocks roared and bond yields collapsed in the final two months of the year. Given that expectations about central-bank policies are still swinging wildly, this year ought to end as another good one.

So did 2020 represent a structural change in the markets business of banks, rather than a blip? There is reason to think so. Among bankers, cautious optimism has replaced talk of normalisation. Asked if robust activity is the “new normal" for banks, Andy Morton, head of markets at Citigroup, responds that “it is hard to say, honestly, but there are some reasons to expect things will remain reasonably volatile". That rates have climbed sharply, after the stasis of the previous decade, has been “a recipe for volatility", he says. He also highlights rising geopolitical tensions and the growth of new industries, such as private credit, as reasons for elevated activity. Trends such as ageing populations and the climate transition might continue to stoke inflation, meaning continued interest-rate volatility. And all kinds of markets have ricocheted in recent years: not just bond and equity markets but also those for currencies and commodities, including European gas.

This leads to a striking conclusion. Perhaps ultra-loose monetary policy was more troublesome for banks than post-financial-crisis regulation. As is now clear, it is perfectly possible to make lots of money intermediating markets without committing the sins of the pre-2008 era—not least taking positions—so long as markets are sufficiently volatile. This kind of financial dynamism might not be welcome news to everyone. But it has undoubtedly made the job of trading markets as lucrative, and physically laborious, as in an earlier golden age. 

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