European banks boost prime brokerage as regulators eye AI risk
European lenders are posting sharp equity trading revenue gains by extending credit to hedge funds, a lucrative but concentrated strategy that faces mounting regulatory scrutiny as tech-fueled market volatility rises.
Barclays, UBS, and BNP Paribas posted second-quarter equity trading revenue jumps of 46%, 53%, and 47% respectively in dollar terms. This surge was largely driven by prime brokerage lending to hedge funds and strong derivatives activity. While impressive, the European gains still trailed the 70%-plus increases reported by the top four US banks, which hold dominant positions in leveraged trader financing.
The pivot reflects a structural shift in global stock trading. As high-speed market makers like Citadel Securities and Jane Street have captured lower-margin flow business, traditional banks have retreated to higher-margin areas. Financing hedge funds and leveraged exchange-traded funds, particularly those tied to volatile tech shares in Asia, has become the primary battleground for revenue growth.
Not all European banks are taking the same level of risk to close the gap. UBS has actively restrained hedge fund borrowing despite heavy client demand, choosing to cap the balance-sheet share allocated to its investment bank to protect its broader wealth management focus. Conversely, Citigroup is aggressively expanding, more than doubling its hedge fund lending to $450 billion between 2022 and 2025, with ambitions to reach $700 billion. Citigroup's equities desks generated a 7% return on capital in 2025, lagging the 17% average of its peers, a deficit it is trying to close through scale.
The appeal of prime broking lies in its capital efficiency. Lending against liquid stock collateral carries low risk weights, generating high returns on capital without bloating the balance sheet. At Barclays, this strategy has lifted the investment bank's revenue-to-risk-weighted-assets ratio to match BNP Paribas. This focus on leverage sets Barclays apart from Deutsche Bank, which abandoned equities trading entirely in 2019. Barclays aims to shrink its investment bank's share of group risk-weighted assets to 50% by 2028, down from roughly 55%, even while expanding this specific lending.
However, this rapid growth concentrates significant systemic danger. Barclays reported that 80% of its markets revenue growth originated from just 100 global clients. The assumption that stock collateral remains easily sellable breaks down when crowded trades unwind simultaneously. The strain is already visible, as some banks are demanding hedge funds post additional collateral. Regulators are also moving, with the Bank of England recently questioning London desks about their exposure to Asian AI-related stocks amid the current selloff.
