Nearly seven years after the financial crisis, banks are still churning out profits and wrestling with regulators.  Yet Wall Street, by many important measures, appears to be in the middle of a humbling transformation.  Bonuses are shrinking. Revenue growth has stalled. Entire business lines are being cut. And some investors are even asking whether the biggest banks should be broken up — changes that are all largely attributed to a not-so-well-known set of rules regarding capital, a financial metric that captures how much cushion banks might have in the event of a crisis.  “We have substantially reduced the amount of risk they can take,” said Timothy Geithner, the former Treasury secretary. "We’ve cut the profitability of banking roughly in half.”  At an industry gathering of Wall Street executives last week, the conversation returned again and again to the big changes already underway — and those yet to come — that have hollowed out trading floors and office towers in Manhattan and Connecticut and taken the swagger out of an industry that has long defined New York.  Revenue growth at U.S. banks has been flat so far this decade, and the average pay for a Goldman Sachs employee has fallen by 25 percent since 2009.  Take Goldman Sachs. It recently reported that the size of its balance sheet — all its loans and holdings — shrank 6 percent since 2010 and 24 percent since 2007, while the pay per employee fell 13 percent since 2010 and 43 percent since 2007.  “We have significantly adjusted both compensation levels and fixed expenses,” the chief executive of Goldman, Lloyd C. Blankfein, told the industry conference in Florida. “We have transformed the financial profile of the firm.”  The decline of these important measures has been largely overlooked partly because the banks successfully fended off more radical proposed changes after the crisis and have recently beaten back some signature elements of the 2010 Dodd-Frank overhaul. And profits at the banks have remained high. JPMorgan Chase recently turned in its largest annual profit ever.  The growth in profits, however, has largely been achieved by cutting costs, including salaries and head count. Overall revenue, the most basic indicator of the industry’s health, has stopped growing for the first time in decades, and has even declined at some banks, forcing executives to rethink every line of their business.  These changes have been spurred partly by the thicket of new rules and prohibitions demanded by Dodd-Frank. In addition, the economic uncertainty around the world has made it harder for banks to expand, which could change once the economic recovery gains surer footing.  But industry executives and regulators alike agree that the broad reshaping of the industry has been driven primarily by the efforts of the Federal Reserve and other regulators to strengthen the amount of capital held by big banks, measures that banks have had less success in lobbying against.  In the simplest sense, the rules about capital require banks to effectively spend a portion of a limited financial resource — their capital — every single time they take a risk by making a loan or a trade. The riskier the trade or loan, the more capital the bank has to allocate.  Banks can increase their pool of capital by raising more money from investors or holding onto profits, but doing so generally costs money and reduces profits accruing to shareholders, which typically include employees of the bank.  The capital rules have had the effect of encouraging banks to focus on parts of their operations in which they are potentially taking fewer risks — like the divisions that manage money for pensions and investors — and de-emphasizing the trading desks.  Lloyd Blankfein, chief executive of Goldman Sachs, shares his thoughts on breaking up big banks.  Some outspoken critics of the banks say that the capital rules do not go far enough and have not changed the day-to-day business at banks.  But even many of the industry’s toughest regulators and critics say the capital rules have forced banks to reconsider every business line and have dashed much of the confidence the industry had both before and immediately after the financial crisis.  “You are hard-wiring a change into the banking industry,” said Mike Mayo, an outspoken bank analyst who has called for the largest banks to shrink. “When we look back 10 years from now, we are going to say the biggest impact was from capital rules.”  Morgan Stanley, which has become Exhibit A for this sort of change, has gone from making nearly 70 percent of its revenue from trading operations before the financial crisis to less than half last year.  This is part of a broader shift across the industry. In 2006, before the financial crisis, banks dedicated 41 percent of their assets to trading — a number that fell to 21 percent in 2013, according to data from the International Monetary Fund.  In a more concrete sign of the change, several foreign banks that built sprawling trading floors in Connecticut less than a decade ago are now looking to sell the buildings or use them for other purposes.  The capital rules have not had nearly as much impact on Main Street banking operations that focus on things like mortgages and small-business lending, encouraging banks to expand in those areas while they shrink their Wall Street divisions.  The new requirements on capital and a closely related metric — leverage — have come in several waves and from different sources. The international organization of central banks, based in Basel, Switzerland, put out the so-called Basel III rules in 2011, demanding that the banks reach certain minimum capital levels by 2015, though the date has since been pushed back.  Many central banks, including the Fed in the United States, have said that banks in their countries must hold even higher capital levels and need to satisfy the requirements sooner than the dates required by Basel III.  Responding to a Goldman Sachs report suggesting the bank would be worth more broken up, Jamie Dimon, chief of JPMorgan Chase, said “we will be a port in the next storm. You want me to be a port.”  In the last few months, the Fed has indicated that it will also require bigger, more interconnected banks to achieve higher capital levels than smaller ones.  Because these new rules are expected to hit JPMorgan Chase particularly hard, some investors and analysts said recently that the bank might need to shrink to bring itself onto a level playing field with competitors. An analyst at Goldman Sachs wrote a report last month that suggested that JPMorgan could be worth more in pieces than it is in its current form.  While JPMorgan executives have said that they do not believe they will have to break up, they have acknowledged that they are singularly focused on managing their capital.  “We are trying to thread the needle, as you say, about making sure that we are as focused as we can be on maximizing the use of that scarce resource,” the chief financial officer at JPMorgan, Marianne Lake, said in a call with investors last month.  Beyond these large-scale changes, the particulars of how the capital requirements are calculated are resonating through every single business line in different ways.  Brady W. Dougan, the chief executive of Credit Suisse, one of the world’s biggest Wall Street banks, said considerations of capital were now a part of his everyday management of the bank.  “It’s become much more a game of driving the highest returns from the businesses that are most suited to the new environment,” he said.  Mr. Dougan is among the many Wall Street executives who say the new capital requirements have gone too far and have unintended consequences.  On the other side, critics of the banks like Sheila C. Bair, who was the chairwoman of the Federal Deposit Insurance Corporation, say all the rules have still forced the banks to cut only at the periphery. But Ms. Bair said that the capital rules were forcing the industry to answer hard questions for the first time.  “We haven’t had that kind of scrutiny in the past, and I think that is healthy,” Ms. Bair said. “It’s not a bad thing for the banks to have to deal with that sort of discipline.”  A version of this article appears in print on February 20, 2015, on page A1 of the New York edition with the headline: New Rules Spur a Humbling Overhaul of Wall St. Banks. Order Reprints| Today's Paper|Subscribe
Wall Street is in a transformation, as bonuses shrink, revenue growth stalls and business lines are cut, driven primarily by regulatory efforts.