Crisis jolts Wall Street bankers already resigned to tough job market

Executives had started to forecast a revival in capital markets in the second half of this year when the failures of the lenders roiled bank stocks and prompted Swiss regulators to orchestrate a takeover of ailing lender Credit Suisse Group AG (CSGN.S).

In an unusual move, Switzerland instructed Credit Suisse to cancel or reduce all outstanding bonus payments for the top three levels of management and examine whether those paid out can be recovered, its Federal Council disclosed on Wednesday.

There has been a public backlash against bonus payouts at the bank, whose rescue by Swiss peer UBS was backed by about 260 billion Swiss francs ($280 billion) of state funding and guarantees.

One likely consequence of the past few weeks of turmoil is that banks tighten their lending standards, which could further hinder dealmaking - making the prospects for jobs and compensation on Wall Street more gloomy.

"It's not a dire scenario, but banks are paring back the excesses from the last years and feel they are moderately overstaffed," said compensation consultant Alan Johnson, who owns a consultancy that specializes in Wall Street pay.

Bankers are also more cautious about future U.S. economic growth as the housing market slows due to higher interest rates curbing demand for mortgages. U.S. consumers are starting to fall behind on credit cards and auto loans in greater numbers, even though delinquencies are still low by historic standards.

An economic slowdown also translates to fewer deals, and raises the prospect of banks cutting jobs in addition to offering smaller bonuses.

The banking crisis will further squeeze the industry "if it creates a credit crunch and hinders dealmaking," Rahul Jain, deputy comptroller for New York, whose office collects taxes from Wall Street for state coffers, told Reuters.

Jain expects bonuses for 2023 to stay flat or shrink by 15%, saying "anything better than that would be good news for New York state and city budgets."

Annual banker bonuses, which are typically paid in the first quarter, had already dropped sharply for 2022.

Bonus payouts for employees in the securities industry in New York fell 26% to an average of $176,700 in 2022 from a record $240,400 in 2021, according to a report from New York State Comptroller Thomas DiNapoli last week.

The industry accounts for 22% of the state's tax collections, and is linked to one in every 11 jobs in the city, the comptroller said.

EXTREMELY CAUTIOUS

Compensation was even lower for U.S. investment bankers, whose bonuses shrank about 30% to 50% from 2021 as deals dried up, estimated Johnson. Commercial bankers' bonuses in the United States fell about 20%, he said.

Traders at U.S. banks bucked the trend, in some cases receiving modest gains in variable pay as trading activity flourished in volatile markets last year.

Now, financial industry workers are fretting not only about pay, but job security. Even before the March crisis, Goldman Sachs Group Inc (GS.N) had laid off more than 3,000 people and Morgan Stanley (MS.N) cut about 1,600 staff. Both banks declined to comment.

One person with knowledge of Goldman's policies said the bank had resumed annual performance reviews that were suspended during the pandemic. The Wall Street giant typically cuts about 5% of its lowest-performing staff as part of the process.

Other banks, including BNY Mellon and HSBC, are also trimming their workforces, sources familiar with the plans have said.

Banks have mainly been adjusting their staffing levels by not replacing employees who leave, said Johnson.

Headcount for banks and financial services fell 5% to 10% in the first quarter from a year earlier, estimated Max Kemnitzer, managing director for banking and financial services at PageGroup, a recruitment consultancy.

Banks have been "extremely" cautious on pay this year, and have chosen to make cuts on the weakest areas likes IPOs and M&A, said Kemnitzer.

Investment firms, such as hedge funds and private equity firms companies, as well as financial technology companies are increasingly attracting talent away from banks, Kemnitzer said.

While there are plenty of reasons to be glum, Wall Street workers are enjoying one silver lining after the pandemic: greater flexibility in structuring their workday.

Even among the companies with the strictest return-to-office policies, employees are being given some options - whether it is working from home one day a week or flexible hours to support commitments outside work, Kemnitzer added.