Bankers are finally feeling the pinch after three years of bumper profits and big bonuses despite government bailouts in the wake of the global financial downturn.
Major western lenders have announced more than 69,000 job cuts this year as they trim costs in anticipation of lower revenues.
The carnage is sweeping both sides of the Atlantic, with big layoffs at HSBC and Lloyds Banking Group in London and Bank of America and Goldman Sachs in the US. But the trouble is most pronounced in Europe, where a sovereign debt crisis continues to rattle policymakers and global markets.
"Almost every bank [in Europe] will be under-capitalised when faced with a raft of sovereign debt restructurings," says Jaap Meijer, an analyst at AlembicHC in Dubai.
"Key to resolving the crisis is addressing the sovereign risk, not endless strengthening of bank's balance sheets. The lesson of 2008 is that the later we act, the more we have to do."
HSBC, the world's second-biggest bank by market capitalisation, announced 30,000 job cuts on August 1, including 5,000 this year and 25,000 by the end of 2013. The British high street lender Lloyds Banking Group is cutting 15,000 jobs, joining UBS, Barclays, Royal Bank of Scotland, ABN Amro and Credit Suisse in the ranks of big European banks paring back their workforces this summer.
In the US, Bank of America announced 6,000 cuts last month. Wells Fargo, the Bank of New York Mellon and Goldman Sachs are also reducing headcounts.
The reasons for the cutbacks vary. Although most US banks are profitable, revenues are dropping as customers avoid taking on new debt.
Customers and businesses learnt a lesson about borrowing too much during the financial crisis, and they are now saving and paying off debt.
So far this year, financial companies in the US have announced 14,252 layoffs, according to July data from the consultancy Challenger, Gray & Christmas. That did not include the layoffs that Bank of America revealed last month.
European lenders face the same pressures, which have increased since the continent's sovereign debt crisis. Jean-Claude Trichet, the head of the European Central Bank (ECB), reiterated last week that lenders had ample cash, but the system remains strained. Eight European banks failed a second round of stress-tests in July, and many more barely passed.
"The recent European stress test has done little to allay investors' concerns about their ability to withstand a default by a European government," says Mr Meijer.
The sovereign debt crisis has hit some countries in Europe hard, including Greece, Ireland, Portugal, Italy and Spain.
After the EU and IMF arranged a second bailout for Greece this year, the ECB last month restarted a bond-buying programme to lower borrowing costs for the continent's troubled countries. A sovereign default has so far been averted. Yet it remains unclear how long Germany and France can continue to support the euro zone's laggards.
Banks in the US and Europe are also facing mounting legal problems. Government-backed mortgage companies - Fannie Mae and Freddie Mac - in the US are suing 17 big banks for US$196 billion (Dh719.91bn), alleging the banks misrepresented the soundness of home loans bought by the mortgage firms.
As job cuts figures balloon, bank executives are invoking the rhetoric of austerity and efficiency.
Lloyds is trying to save $2.4bn through spending cuts, most of which will come in the form of layoffs in the UK and a retreat from international markets.
"Lloyds must become leaner, more agile and more responsive," Antonio Horta-Osorio, the bank's chief executive, said last month. That would force the bank to refocus on its home UK market and "reduce our international presence" while selling off operations deemed inessential.
The turmoil for European and American banks has yet to hit the Middle East, and analysts do not expect it to have a major impact here. HSBC cut 68 UAE jobs in April, but Raj Madha, an analyst at Rasmala in Dubai, says the region's lenders faced a fundamentally different set of challenges than their western peers.
"I wouldn't say it is happening here, because cost-to-income ratios are still very low, profitability and capital are both high and the struggle is for growth, not profitability," says Mr Madha.
Banks in the Gulf have had their share of troubles during the financial downturn, most notably those involving Dubai's struggle with debt.
Loans to the emirate's state-owned companies, including Dubai World, have had to be restructured and extended. Many customers have lost their jobs and defaulted. And companies have seen business dry up, which has in some cases pushed them into insolvency.
The region's lenders responded by firming up their balance sheets with the help of government cash injections. Loan-to-deposit ratios - rough measures of banks' capital cushions - have strengthened. Provisions set aside to cover bad loans rose to Dh47.3bn in June, up from Dh32.6bn at the end of 2009.
"We continue to believe the Mena [Middle East and North Africa] banks are well capitalised, and are in a much better shape than US and European banks," says Mr Meijer.
Unlike in the West, revenues at Middle Eastern banks are beginning to recover. Regional banks also have a lot of money to lend.
The worry is how these banks will stay strong while taking risks on local companies and individuals when the global backdrop is so shaky.
