Investment banks around the world have been reeling from a cyclical downturn in underwriting and trading profits and from long-term structural shifts that have made their core business less attractive. These are the firms that underwrite securities, trade a variety of financial instruments and currencies, and provide associated advisory services—for instance, in mergers and acquisitions. In today’s environment, most investment banks are reassessing their strategies for growth and their management of internal operations, but nowhere is this soul-searching more intense than in Europe.

A specific set of difficulties afflicts the players in this region: a broad but undistinctive product offering, a high level of costs, and a lack of the international distribution network that is essential to true global success. Worse still, such is the state of the industry that even addressing these shortcomings will not guarantee an attractive role for European investment banks. More creative solutions will almost certainly be required.

Europe’s predicament

The root of the current predicament for European investment banks lies in their failure to respond to the changes that have taken place in their external environment over the past decade: the globalization of capital, the...