Annus horribilis or a Happy New Year?

With the US on the edge of a fiscal cliff, a global climate of sluggish markets and regulatory fatigue persisting like a stubborn flu, one could be forgiven for not expecting a lot more out of 2013 than you got out of the current year.

And David Field, executive director at consultancy Rule Financial, is telling his clients there isn’t a lot to be joyful about this holiday season.

He says the biggest single threat to banking will be the possible collapse of the euro, which would throw financial services into panic, with huge losses, write-offs and legal uncertainty about who is sitting on what losses.

But even if you’re optimistic that the euro will hold firm, Field warns that full service investment banks could shrink, with firms continuing to withdraw from non-core operations and close unprofitable businesses to the point where in Europe, he sees the possibility of a single ‘tier one’ investment bank dominating the region.

And if you work for a smaller bank, get ready for more Spanish-style consolidation as pressure continues on the little guy. Yet mid-sized banks will remain reluctant to merge if it means edging them closer to the threshold of becoming a systemically important financial institution (SIFI) and the increased capital requirements which such a privilege would compel.

With continued consolidation pressure will come more bank lay-offs. This year we already saw wholesale attrition at a number of institutions (think 10,000 at UBS) and Field says already the ratio of front to back office staff has risen to an “unsustainable” 1:4.

“So far we have seen 10% of investment banking costs cut – there is another 10% to go. Inefficiency in the back office is under scrutiny and there will be further significant headcount reductions, as jobs are moved offshore and jobs being made obsolete through support functions being centralised,” says Field.

Field also reminds us that 2013 is shaping up to harken the ‘coming of age’ of regulation, where new rules will bring shadow banking under control and central clearing will begin to bring transparency to the OTC derivatives markets.

The European markets infrastructure regulation comes into play, standardising OTC derivatives where possible so they can be traded on exchange-like platforms and centrally cleared. In the US, Dodd-Frank has already begun this task and will continue to move towards greater regulatory clarity in Q1 and Q2.

In the UK, Field believes ring-fencing proposals contained in the Vickers Report provides the most threatening regulatory cost to banks and redesigning operating models “will not come cheap”.

So. Erm. Happy Holidays? And a prosperous New Year? Ahem.