Dow Jones

LONDON - Europe could see the same kind of slowdown in investment banking growth that the United States has witnessed in recent months.

Banks will probably find it harder than they think to rein in costs to match the slowdown in business. And at the same time there's the whiff of price competition starting to circle some of the very fat fee-paying parts of their business.

All of which suggests that the recent experience of ever tighter margins suffered by Morgan Stanley Dean Witter & Co. and Goldman Sachs Group Inc. is likely to become a more general complaint for the sector.

On the one side there's the hefty cost of soaring compensation packages stemming from a hiring boom that boosted head counts at most investment banks in Europe by 75% to 100% during 2000, according to research by Morgan Stanley Dean Witter.

Banks have felt confident about being able to control costs during a slowdown by making bonuses - the variable part of wages - an ever bigger part of pay packets. Base salaries have hardly moved in five years, says one investment banker. But bonuses guaranteed for two or three years have meant sacrificing flexibility by banks that desperately tried to hold onto their best staff during the best of the boom.

Lucrative segments of the investment banking business have already started to slow.

Global M&A activity grew 5.5% in value last year from 1999, according to data from Thomson Financial. But most industry watchers think that the 11% drop in business during the final quarter is a sign of things to come.

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