The number of European investment banks are slowly shrinking due to tougher regulations spawned from the financial crisis. Financial institutions such as the Royal Bank of Scotland and UBS have already suffered some dramatic setbacks from job cuts and structural overhaul. Barclays recently started scaling back on some regions and products while Credit Suisse and Deutsche look to do the same, reports the Financial Times.

This move is exactly what regulators and governments wanted in an effort to get banks on track amid the financial meltdown. In other words, new rules and more support from politicians have led European banks to steer away from investment banking.  The power of investment banking has now shifted to the U.S where Goldman Sachs and Morgan Stanley continue to generate a large portion of their business from investment banking.  Even though the first round of regulations have made a quite positive impact on how banks behave, it caused major changes in the investment banking community.  The Financial Times article warns, however that the next slew of regulations will have a greater effect but not for better—this time, customers and the European economy might be exposed to even more risks.

In the U.K. for example, HSBC will have to deal with more than 3 years of structural changes to comply with new rules on ringfencing—a mandatory split between lending and higher-risk trading activities for banks such as investment banking. Last week, HSBC reminded its customers of upcoming changes in the wake of its announcement to rebrand its U.K. high street operations to HSBC UK. This change comes in light of the new ringfencing requirements.

Banks are awaiting the final rules, which will be published by the Prudential Regulation Authority next month. While many are anxious to learn about PRA’s decision, banks are hoping that the watchdog softens its stance on ringfencing compliance. 

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