OREANDA-NEWS. Increased regulatory requirements for capital, liquidity and resolvable group structures are forcing the 12 global trading and universal banks (GTUBs) to adapt their strategies to ensure that they can generate adequate risk-adjusted returns. This is driving a strategic business model rethink at some GTUBs, notably some of the European groups, says Fitch Ratings.

Our latest GTUB peer review highlights the challenges that some of these groups face in defining a profitable business model. We see an advantage for those groups whose management can dedicate most time to the business compared with those that have to devote material management resources to adapting strategies. The five US-based GTUBs (JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley) are better placed than their European peers, also because of more promising growth prospects in their domestic market.

Regulatory pressure for more transparent, resolvable group structures affects the GTUBs more than other banks because of their size and their global operations. Groups have started to adapt legal entity structures accordingly. This is taking up considerable management time, but we expect that the banks will manage these changes successfully as regulatory expectations become clearer.

As part of the new regulations, the GTUBs will have to comply with minimum total loss-absorbing capacity (TLAC) rules, and we expect increased clarity on the final requirements ahead of the G20 meeting in November 2015. TLAC arrangements for the US, Swiss and UK GTUBs will be centred around holding company structures, while we expect Deutsche Bank to meet requirements by the subordination of senior debt to other senior obligations through a pending change to national law. The arrangements for the two French GTUBs, BNP Paribas and Societe Generale, are less clear as no final decision on how to achieve TLAC subordination has been taken yet.

We expect less substantial changes to the US GTUBs' business models and legal entity structures as they operate under holding company structures that make resolution easier and have largely rationalised their legal entities in recent years.

The European GTUBs, which have smaller franchises in the large US capital markets, will need to adapt their strategies to improve profitability in their securities businesses. UBS has made the most substantial reduction in its capital markets business in recent years. Senior management changes at Barclays, Credit Suisse and Deutsche Bank in 2015 highlight the challenges in defining and fully implementing strategic plans for global universal banks in an evolving regulatory climate. This is especially true at a time when low interest rates look set to prevail in most of Europe, which dampens historically more dependable earnings potential from commercial banking and wealth management.