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Chapter Five
Investment
Banking
Investment Banking Activities
 Accepting
 Corporate finance
 Securities trading
 Investment management
 Loan arrangement
 Foreign exchange
Accepting
 A bank’s signature is put on a bill of exchange to give it a
better credit quality
 The bill of exchange is a promise to pay a trade debt. If the
bank is on the central bank’s list for this purpose, the bill is
a bank bill. Others are trade bills
 The bill is frequently sold at a discount
 Commercial banks will accept bills, too, but historically, it
is an investment bank activity
Corporate Finance
Corporate finance is likely to be a department of major
importance in any investment bank. This department
will manage:
 New issues, e.g.; equities/bonds
 Rights issues
 Mergers and acquisitions
 Research
Top Global M&A Advisers, 2011
Adviser
Deal value (Volume)
$bn
_________________________________________________________
Goldman Sachs
542
JP Morgan
441
Morgan Stanley
427
Credit Suisse
340
Barclays Capital
320
Bank of America
/Merrill Lynch
313
Citigroup
284
Deutsche Bank
240
Lazard Ltd
227
UBS AG
205
____________________________________________________________
Source: Bloomberg (2012) Global Financial Advisory Mergers and Acquisitions
Rankings
Securities Trading
 While corporate finance department deal with primary
market new issues and rights issues. Securities trading
takes us into the secondary market dealing in the same
equities and bonds
 The trading will take place in one of the modern dealing
rooms, with computer terminals and communications
giving up-to-the-minute prices and contact with other
dealers and investors all over the world
 The dealings will cover domestic bonds and equities and
international bonds and equities
Investment Management
The investment funds these managers control may be
the bank’s own funds or they may be, in effect, ‘looking
after other people’s money’. These may be:
 High net worth individuals
 Corporate clients
 Pension funds
 Mutual funds
Regulation
 Glass-Steagll Act of 1933: This introduced a deposit
protection scheme, gave the Federal Reserve Bank greater
powers of supervision and separated commercial and
investment banking
 Ariticle 65 of the Japanese Exchange and Securities Code
 From 1987 onwards, there were several abortive attempts to
repeal Glass-Steagall and it was finally repealed by the
Gramm-Leach-Bliley Act of November 1999
Regulation (cont.)
 As a consequence of this deregulatory process, the largest
commercial banks have transformed themselves into fullservice financial firms offering a full range of investment
banking services operating as universal institutions
 Banks became much more reliant on securities market
activity to generate income and this fuelled the
securitization trend – particularly for mortgage-backed
securities products. This, in turn, fuelled property prices,
which encouraged more mortgage lending funded by the
issuance of increasingly complex mortgage-backed
securities (including collateralized debt obligations)
Investment Banking and Crisis
 Nowadays, the obvious consensus is that the increasing
integration of commercial and investment banking, and
the increased importance of markets, have led to too much
risk – in fact a systemic collapse, which nobody seemed to
be able to predict
 The 2010 Dodd Frank Act in the US introduced the socalled Volcker Rule that prohibits commercial banks from
high risk investment banking including proprietary trading
and limits to investments in hedge funds and private equity.
 Similar (ring-fencing) restrictions proposed by the UK
Vickers Commission in September 2011 and by the EU’s
Liikanen Report (2012)