TL;DR Breakdown
- U.S. banks spent over $1 billion on severance costs in H1 2023 due to overexpansion during COVID-19.
- Goldman Sachs, Morgan Stanley, and Citigroup were among the hardest hit, spending millions on staff reductions.
- Industry leaders are divided over whether more layoffs will be needed as the year progresses.
Description
A recent financial shock has rocked Wall Street as U.S. banks have tallied up over $1 billion in severance costs in the first half of 2023. This financial hit signals the high price of rectifying aggressive overexpansion during the COVID-19 pandemic. The billion-dollar payout Among the banking giants bearing the brunt of these costs are … Read more
A recent financial shock has rocked Wall Street as U.S. banks have tallied up over $1 billion in severance costs in the first half of 2023. This financial hit signals the high price of rectifying aggressive overexpansion during the COVID-19 pandemic.
The billion-dollar payout
Among the banking giants bearing the brunt of these costs are Goldman Sachs, Morgan Stanley, and Citigroup. Goldman Sachs, which has felt the sting of a slowdown in trading and investment banking, informed investors that it has expended $260 million in severance for the first six months of the year.
This decision has resulted in roughly 3,400 layoffs, equating to 7% of the bank’s total workforce.
Similar numbers come from Morgan Stanley, who reported more than $300 million spent on severance costs, associated with approximately 3,000 employee terminations. Not far behind, Citigroup confirmed $450 million in severance-related expenses, following nearly 5,000 job cuts.
These redundancies in the banking sector were necessitated by an unfortunate oversight during the COVID-19 pandemic.
Banks found themselves expanding their workforce too aggressively to manage a surge in trading and deal-making, only to find themselves overstaffed when remote working hampered productivity.
U.S. investment banking: A tale of boom and bust
In the rollercoaster world of investment banking, Wall Street has seen a speedy shift from a hiring boom to sweeping layoffs, with more than 11,000 terminations announced this year.
However, this leaves banking executives grappling with a tough question: will more layoffs, and consequently more severance payments, be required as the year unfolds?
Opinions among industry leaders are mixed. Morgan Stanley’s CFO, Sharon Yeshaya, remains optimistic about a backlog of deals and the bank’s positioning for potential growth.
Similarly, Goldman Sachs’ CEO, David Solomon, announced another round of performance-based layoffs but added that no additional specific headcount plans are on the table.
In contrast, Citigroup seems to signal a more severe path, hinting at a leaner organizational model for the latter half of the year. Wells Fargo, already having reduced its headcount by 5,000 this year and 40,000 since mid-2020, plans further reductions.
It stands out as one of the few large banks that did not inflate its workforce during the pandemic, due in part to a regulatory asset cap following legal complications.
The “leaner model” approach is evident at Bank of America too, which reported 4,000 position cuts, primarily through attrition, thus dodging hefty severance checks.
JPMorgan Chase stands as the outlier, expanding its workforce by 8% to 300,000 in Q2. This growth does not account for employees integrated from First Republic, a California-based lender acquired in May.
In conclusion, the billion-dollar severance cost serves as a stark reminder of the precarious balance between aggressive expansion and prudent staffing in uncertain times.
As the year progresses, the U.S. banking industry will continue to grapple with this delicate equilibrium, with potentially more billion-dollar payouts on the horizon.
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