Job cuts. Plunging share prices. A slew of regulation that is forcing a radical overhaul of the way banks do business.

    Three years on from the collapse of Lehman Brothers, the outlook for the global investment banking industry is the worst it has been since the financial crisis.

    ??Investment banking is on the defensive and on the wane,?? warns Standard & Poor??s, the credit ratings agency, in its latest analysis of the sector.

    Long gone is the relative boom of 2009, when banks, buoyed by unprecedented fiscal stimulus and the resultant surge in activity in the debt markets, posted bumper revenues in their investment banking divisions ?C even as they wrote off billions in soured loans.

    While taxpayers clamoured for retribution after having bailed out the banking system, institutions such as Barclays, Credit Suisse and Goldman Sachs went on a hiring spree, adding thousands of staff in a bid to take market share from weakened competitors.

    Like most politicians, however, senior bankers anticipated a much stronger recovery, and failed to predict the impact of a spiralling sovereign debt crisis in the eurozone. As a result, most investment banks are now carrying far too many people, particularly in ??back office?? operational roles that add nothing to their bottom line.

    Ruthless cost-cutting reminiscent of recessions past is already underway on Wall Street and across the City of London. More than 60,000 job losses ?C between two and five per cent of the workforces at banks such as HSBC, Goldman and Royal Bank of Scotland ?C have been announced across the sector in recent weeks, with warnings of more to come if activity fails to pick up significantly.

    Bringing down the pay of those that are left remains a daunting ?C but equally necessary ?C step for senior executives who acknowledge that, as earnings are squeezed, distributing nearly half their revenues to staff in the form of salary and bonuses is unsustainable.

    Regulators have already forced banks to overhaul the way they structure pay. Most bankers are taking home lower cash bonuses and higher fixed salaries, in theory limiting their incentive to take excessively risky positions in pursuit of one-off payouts.

    But bank supervisors have generally declined to limit total pay levels, meaning that most banks?? wage bills remain at or even above pre-crisis levels. But there are now signs that banks are themselves reining in pay; at Goldman, for example, several hundred senior bankers in London were recently ??reminded?? that temporarily higher salaries agreed in 2009 as the UK threatened a crackdown on bonuses would expire and would not be renewed.

    ??Do I think that this will remain an industry where top performers are incredibly well remunerated? Yes I do,?? says one UK-based investment banking head. ??But I also think average and even above average people will be paid less.??

    Aggressive cost cutting is already bearing fruit for the sector ?C a recent analysis from Barclays Capital shows that among 11 large European investment banks, profitability ?C measured by pre-provision profits as a percentage of assets ?C were about 40 per cent higher in mid-2011 than they were at the end of 2007.

    But slashing costs will not be enough to raise returns to pre-crisis levels in an environment where some of investment banks?? most lucrative trading operations, such as ??proprietary?? trading with the banks?? own money, have already been closed down by regulators.

    Even more significantly, dramatically higher capital requirements under a new framework set by global regulators is forcing investment banks to scale back capital-intensive activities, particularly in fixed income trading, their core source of revenues.