March 21, 2018 / 2:40 PM / a year ago

Brexit set to shrink Europe markets revenues, MS chief warns

LONDON, March 20 (IFR) - Europe's capital markets revenues is set to shrink as a result of Brexit, Morgan Stanley president Colm Kelleher warned this week.

Kelleher said he was less worried about competition in Europe than the size of the region's revenues available for banks to share once Britain leaves the European Union in March 2019.

"My big concern will be that when Brexit actually happens and you end up moving people back and forth, the sum of the parts - ie, what goes on in the EU plus what goes on in the UK - my guess is that will be less than what was going on before," Kelleher told investors on Tuesday at a Morgan Stanley conference in London.

"Let's not forget Europe, and London in particular, got a massive dividend out of the US when Sarbanes-Oxley was applied, and what you're going to see is some reversal of that," he said, referring to US regulatory changes in 2002.

"So I think Europe will be a smaller place."

Kelleher said while financial regulators in the US are taking a friendlier stance, regulators in Europe are being more conservative as they assess the impact of Brexit.

"My experience of regulators is that when things are uncertain they stay very prudent, and I think that is the environment in Europe at the moment.

"The regulatory environment in Europe is as tight as it's ever been," he said.

The US regulatory landscape is more positive, although Kelleher said banks need to first get through a tough stress test, known as comprehensive capital analysis and review (CCAR), which could limit the amount of shares banks can buy back.

CCAR will apply assumptions including US unemployment jumping to 10%, an equity market sell-off and a steepening Treasury yield curve. Banks need to submit results and capital plans to the US Federal Reserve by April 5, and results will be released by the end of June.

"This is a very hard test ... so we'll have to get through this. That will have implications for people's buyback programmes; they will not be like they were in previous years, they cannot be by definition," Kelleher said.

But there have been comments from US Fed chairman Jerome Powell, top Fed bank regulator Randal Quarles and SEC chairman Jay Clayton, among others that suggest some regulatory relief may be forthcoming.

"They've said duplication of regulations has caused constraints and heaviness of touch is something that needs to be reversed somewhat," Kelleher said.

As a result, changes could filter through from "supervisory touch" rather than from changes in legislation. This could include changes in definition of leverage ratios, liquidity rules and the CCAR process, he said.


In a wide-ranging discussion, Kelleher said he was looking forward to technology shaking up bond trading, among other areas.

"We can’t wait for fixed income to go electronic, we don't see it as a threat," he said.

Equities trading has shifted to electronic trading over the past 18 years and Kelleher said 95% of equity trading in the US is now electronic and in Europe it's about 87%. A majority of bond trading volume is still done by phone or over a messaging system.

"In 2000 when equities went electronic the bid/offer did get crushed, but we got 15 times the volume. So we can't wait for technology to kick in in fixed income so we can take advantage of that and reduce redundant costs," he said.

Kelleher echoed comments from some banks executives that trading revenues had been good so far this year, though he was cautious about predicting it will be up from a strong first quarter of 2017.

"Q1 will probably be as strong as Q1 of last year roughly, across the Street," Kelleher said.

"Last year the first quarter was very strong, this year the first quarter is strong. We've had a pick up in revenues from a very depressed fourth quarter and there clearly are structural tailwinds in place."

Long-term positives include the withdrawal from quantitative easing and a pick-up in market volatility, but Kelleher said it was too early if they will buoy trading through the year. (Reporting by Steve Slater)

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