Wall Street’s hottest business is about to cool

BANKS and shadow banks are meant to exist in separate worlds, but the financial links between them are increasingly seen as a source of potential instability. That’s a problem for banks because the business of forging those ties has lately been among the hottest activities on Wall Street.

The largely unseen lending boom in the fixed-income, currencies and commodities (FICC) trading arms of big banks has been driven by two of the strongest trends of the past decade: the secular rise of private markets and multi-strategy hedge funds. Now, with watchdogs focusing more on the risks and with interest rate cuts around the corner, the question is whether the so-called FICC financing is about to run out of steam.

This matters for the banks. They have been investing capital and resources in this lending as well as the prime-broking operations that predominantly finance hedge funds’ stock market bets to counteract the squeeze on traditional market making from electronic upstarts, such as Jane Street and Citadel Securities.