Hurricane Irene may be gone, but Wall Street remains embroiled in its own industry-wide storm. Profits are down and many investors are worried that they'll never return to former levels.  Many have dumped bank stocks, sending share prices plummetting. Combined with stricter regulation and slowing economies, the markets have fundamentally changed. Banks' profit-making strategies will have to change as well.

The first move banks make in down times is to slash jobs to cut costs and this year has been no different. A report by Morgan Stanley in March said the world's largest 20 banks still have about 20,000 employees more than they need in their middle and back offices. Front office employees, whose paychecks tend to be considerably larger, are also targets of cost-cutting. At the end of the day, total job cuts at the major banks worldwide may top 50,000 this year.

But job eliminations alone aren't the only changes that may be coming. In payroll, the practice of using half of revenue for salaries is no longer sustainable. Using a 30% to 35% share of revenue for salaries and bonuses is more reasonable, even to Street insiders. But since cutting pay can be suicidal for a bank chief, bonuses have been instead restructured to include more stock options and other long-term payouts.

Most importantly, banks' old strategy of offering low-margin services to pull investors into high-margin ones simply isn't feasible anymore. Stricter regulation has limited the profitability of old high-margin product such as tailor-made derivatives and proprietary trading. Equity trading and advice on mergers and acquisitions are products less sensitive to regulation, but even as they improve with the economy, they still don't offer enough revenue to boost banks to former levels.

So how are banks to survive? Banks will have to both get bigger and more efficient. In an envirmonment where every opportunity counts, the banks that can most quickly capture business globally will be successful. Doing so requires a massive outlay in infrastructure and technology in order to keep up, which is an area of spending that Wall Street has historically been loathe to do. But in this climate, shifting money from payroll to investments may not just be necessary, but a means of survival.  [WS Journal, 8/30/11]