LONDON, March 19 (Reuters) - Investment banks are likely toshrink by another 10 to 15 percent in the next two years as theycut back their trading desks due to the impact of tougherregulations, a study said.
That will reduce market liquidity and could raise tradingcosts for asset managers, forcing them to invest more in tradingcapabilities, according to the study by Morgan Stanley and consultancy Oliver Wyman.
New rules introduced since the 2007/09 financial crisisrequire banks to hold more capital for trading activities,making these areas less profitable and prompting cuts to tradingdesks.
Investment banks' balance sheets supporting trading marketshave decreased by 20 percent since 2010, and by 40 percent inrisk-weighted asset terms, the report said.
European investment banks will shrink by another 14 percenton aggregate in the next two years, Morgan Stanley analyst Huwvan Steenis estimated in the report.
That would include a 43 percent reduction at Royal Bank ofScotland, 25 percent at Credit Suisse, 19percent at UBS, 18 percent at Barclays and 10percent at Deutsche Bank.
"For banks, the diminishing returns on capital frommarket-making call for more and faster structural change," thereport said, estimating that for banks to improve their returnon equity (RoE) to above 10 percent they need to deliver 2 to 3percentage points of RoE improvement from restructuring.
"More strategic selection is required, particularly in FICC(fixed income, currencies and commodities) and overseasmarkets," it said, adding they also needed to shift to a moretechnology-driven model.
The report said asset managers were increasingly concernedabout the reduction in market liquidity and estimated the needfor them to invest in trading and execution, collateralmanagement and risk management could add between 1 and 5percentage points to their costs. (Reporting by Steve Slater; Editing by David Holmes)