[ by Melanie Gretchen ] Talk about shrinking bank balance sheets.  Another $1 trillion of global cuts are expected to be taken within the next 2 years - including $10 - $12 billion in personnel costs - reduced pay, terminations, eliminating noncore investments and business units. These numbers were presented in a joint report by Morgan Stanley and consultant Oliver Wyman.  All told, the $1 trillion in cuts to investment bank balance sheets represents about 7% of their totals.  Wholesale banks will also be affected by higher funding costs and increased regulatory pressure to bolster capital, which in turn will force them to cut 15%, or up to $0.9 trillion, of assets that are weighted by risk. Looking Forward. To date, investment banks have taken out about 7% of capacity last year and will cut up to another 10th in the next 2 years, the report said.  Toward meeting regulatory pressure and the euro zone sovereign debt crisis, a number of banks have embarked on heavy cost-cutting in the past six months, shedding staff and assets and closing down or selling whole units:

• RBS is removing £70 billion ($112 billion) of risk-weighted assets in its investment bank by pulling out of or downsizing cash equities, corporate broking and equity capital markets operations.
• UBS is paring back its investment bank by getting out of some fixed income areas and proprietary trading.

Forecasts. Ted Moynihan, partner at Oliver Wyman, said the shake-up would cause 15% of global market share to change hands in the near future:

"It is like a game of musical chairs.  Firms will have to choose which operations they prune drastically and in which they have a comparative advantage and are able to invest in scale to win market share."

The scale of the cuts would help banks to come back to return on equity levels of 12-15% in the next 2 years, up from an average of 8% in the past year, according to Morgan Stanley analyst Huw van Steenis.  His prediction is based on the assumption that crisis-depressed revenues have reached their lowest level and could rise 5-10 % annually. Other analysts and bank executives think that that number is much lower.  "The banking sector will not be able to reach a return on equity beyond 11 to 12% this year and next," the CEO of one large continental European bank said. For its part, JP Morgan Cazenove predicted in a recent report that a lower revenue base, tighter regulation, and consistently high staff costs would push down average return on equity to 6.8% by 2013. We'll see soon, one way or another. For further details, go to [CNBC, 3/25/12].