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Main Business Scope Of Investment Banks

2008/10/18 14:07:00 41910

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For a long time, Wall Street, known as a group of independent brokerage firms engaged in securities trading, providing advisory services to customers, and less regulated than traditional banks engaged in savings and loan business, will be concluded.

The two most prestigious Financial Institutions on Wall Street will be closely supervised by the national banking regulators. They need to meet new capital requirements and accept additional regulation, and the level of profitability will be much lower than before.

The main competitors of Goldman Sachs and Morgan Stanley, including Merrill Lynch, Lehman Brother Holding Inc and Bell Sten, have been merged into larger banks or sought bankruptcy protection.

In order to prevent the Wall Street crisis from spreading to two major financial institutions, the US Federal Reserve (Fed) adopted an unusual measure on Sunday night to approve the pformation of Morgan Stanley and Goldman Sachs from the investment bank to the traditional Banking Holding Company.

So far, Wall Street investment bank, which is known for decades, has come to an end.

The concept of investment bank

In general, banks (commercial banks) operate indirect financing businesses, earn profits through the interest gap between depositors' deposits and enterprise loans, while investment banks operate direct financing businesses. Generally speaking, they neither accept deposits nor lend loans, but provide enterprises with issuing stocks, issuing bonds or restructuring and clearing business, and extract commissions. In addition, investment banks provide investors with securities brokerage services and asset management services, and use their own capital to invest or speculate in capital markets.

In the United States, financial institutions that run the above businesses are generally referred to as investment banks. They are called securities companies in China, Japan and other Asian countries, and are called merchant banks in Europe.

Because European financial industry has adopted mixed operation in history, the number of independent "merchant banks" is not large. Most of them are comprehensive banks or "universal banks", that is, commercial banks and investment banking businesses.

The origin and development of investment banks

In the United States, investment banks often come from two sources: one is the decomposition of commercial banks, the typical example is Morgan Stanley; the two is developed by securities brokers, a typical example is Merrill Lynch.

The separation of investment bank and commercial bank in the United States occurred after the great crash of 1929. At that time, the federal government believed that investment banking business had a higher risk and prohibited commercial banks from using depositors' funds to join the investment banking business. As a result, a large number of comprehensive banks were forced to be divided into commercial banks and investment banks. The most typical example was Morgan bank's decomposition into Morgan Stanley, an investment banking business, and Morgan chase, a commercial bank.

But in Europe, governments have not issued such a restriction. Investment banking is usually done by commercial banks, so there are many so-called Universal Bank or Merchant Bank, such as Deutsche Bank, Holland bank, Swiss bank, Credit Suisse Bank and so on.

Facts have proved that commercial banks and investment banks have been completed by the same financial institution, not only did they not cause financial crisis in Europe, but to a certain extent, they strengthened the financing efficiency and reduced the risk of the financial system.

The profitability of investment banking is generally high.

Take the most common stock issuing business as an example, the investment bank usually takes the Commission of 2%-5%, that is to say, if the customer issues a stock worth 10 billion US dollars, the investment bank will extract 200 million -5 billion Commission.

The profit of bond issuing business is relatively small, but the risk is also small.

In addition, merger and reorganization and bankruptcy liquidation are the main profit growth points of investment banks in recent years. In recent years, large mergers and acquisitions in Europe and America often involve investment banks.

After 1990s, the pattern of the world investment bank gradually changed.

On the one hand, mergers and acquisitions swept through the financial sector of the United States, including Citigroup, J.P. Morgan chase (JP Morgan), Bank of America and other large financial groups, all of them want to enter the field of lucrative investment banking.

On the other hand, the investment banks in Wall Street are too close to the securities analysis business. Many investors and the media believe that the analysts employed by the investment banks are hard to guarantee their independence and thus have doubts about the business ethics of investment banks.

However, if investment banks and securities analysis business are completely separated, investment banking business will become a passive source of water, and securities analysis business will lose a huge profit commission, both of which are difficult to survive.

In contrast, commercial banks have inherent advantages in managing investment banking business. They can win many customers by using the deposit and loan relationship network with large enterprises, and do not rely on securities analysis and consultation to attract customers like traditional investment banks.

Commercial banks have more capital and better reputation. What they lack is the business experience in the investment banking field.

Main business of investment banks

Investment banking in a narrow sense refers only to financial advisers, including advisory services such as mergers and acquisitions, restructuring, stock pfer, and underwriting (including stock issuance, debt issuance, special financial instruments issuance, etc.).

Broadly speaking, investment banking also includes sales and pactions in two tier markets, including securities brokers, research, asset management, private wealth management, private equity and venture capital.

Some large investment banks also issue their own credit cards and set foot in commercial banks.