Diverging monetary policies are creating ideal conditions for banks to make money from trading currencies as Credit Suisse Group AG to Goldman Sachs Group Inc. say rising volatility is boosting earnings.
“If there’s higher volatility, there’s higher volume and higher opportunities for us to generate revenue,” Bernie Sinniah, the London-based global head of corporate foreign-exchange sales at Citigroup Inc., the second-biggest currency trader, said in a phone interview.
Volumes in the biggest financial market jumped to a record $5.7 trillion a day in June, according to the latest data from CLS Bank, which operates the world’s largest foreign-exchange settlement system. Deutsche Bank AG and Barclays Plc, which had the highest revenue from currency trading in 2012, published results today while HSBC Holdings Plc reports in the next week.
While the Federal Reserve said it plans to reduce the money it pumps into the U.S. economy should a recovery take hold, the European Central Bank is considering additional stimulus and the Bank of Japan announced four months ago an unprecedented bond-buying program. The JPMorgan Global FX Volatility Index jumped last month to the highest level since June 2012.
The rise in price swings should bolster banks’ profits at a time when stricter regulations after the financial crisis threaten earnings from other divisions. The Basel Committee on Banking Supervision’s latest rules, known as Basel III, will force the world’s 101 largest banks to set aside additional capital to cushion against potential losses from businesses such as fixed-income.
“Foreign-exchange, which isn’t a heavy consumer of risk- weighted assets or balance sheet, will become more important,” George Athanasopulous, the co-head of global foreign exchange at Zurich-based UBS AG, which reported second-quarter earnings today, said in an interview. “Stringent capital requirements will reduce the footprint of businesses which rely heavily on risk-weighted assets and balance sheet.”
Frankfurt-based Deutsche Bank, the biggest foreign-exchange trader, earned the most from this business in 2012 at about $2.7 billion, while Barclays in London received $1.8 billion, according to JPMorgan Chase & Co. estimates on June 28.