MN50412 Investment Banking. General information Lecturer: Dr Richard Fairchild Office: Wessex House 8.52 Email: [email protected] Lecture time: Thursdays 9.15 – 11.15 am Office hours: Tuesday 14.15pm- 15.15pm. What is investment banking?. The banking function.
The banking function can be decomposed into:
Investment banking activities include:
- Evaluate the issuer
- Determine the offering price
- Buy the shares from the issuer
- Find investors and sell the shares
- Initial public offering (IPOs)
- Venture capital
- LBOs: using borrowed money for a substantial portion of the purchase price of the buyout company
- IB can raise funds for private equity funds or manage these funds themselves
transactions with corporations, governments and institutional
- IB have a marginal role in deposits and loan activities.
- IB usually take short-term positions, i.e. few days (except in the non-core business of venture capital). Commercial banks take longer term positions.
Commercial banks funds and those having them:
Institutions whose current operations consist mostly in granting loans and receiving deposits from businesses and customers
Banks that combine commercial and investment banking
Example: UBS, Citibank, Bank of America
- Active vs. passive management
- Performance measurement
Sectors' share in UK GDP funds and those having them:
Financial services jobs in central London funds and those having them:
UK sector trade balances funds and those having them:
Tax contribution of UK financial services funds and those having them:
IB revenues funds and those having them:
Funds under management funds and those having them:
Sovereign wealth funds under funds and those having them:
Global private equity funds and those having them:
UK market shares funds and those having them:
Turnover of London based derivatives funds and those having them:
The modern concept of “Investment Bank” was created by the Glass-Steagall act (Banking Act of 1933). Following the 1929 stock market crash, large banks went bankrupt.
Glass-Steagall separated commercial banks, investment banks, and insurance companies.
In 1999 the Glass-Steagall Act was waived (Graham-Leach-Bliley Act).
In the past, separation between:
Brokers: Rout the orders of customers to the stock exchange, give advices on investments. They cannot take positions in the stocks that act as brokers for.
Jobbers: Market makers that could trade only with the brokers, not with the general public.
Merchant banks: Commercial banks that offer corporate finance services (M&A advisory, underwriting etc.). Did not own the brokers.
In 1986: Big bang:
Abolition of fixed commission to increase competition
Dual capacity: Jobbers, brokers and merchant banks can integrate
The US had deregulated fees in 1975
Business became much more complex, more difficult to manage
Lack of managerial experience
Clash of cultures brokers/jobbers/merchant banks
Markets became volatile after the 1987 crash
Results became volatile and UK banks made substantial losses
1995 saw many UK banks fail amid losses
Reasons for US success since the 1990s funds and those having them:
Large financial and management resources, meaning that they were less exposed
Huge profits in the US market allowed cross-subsidisation in Europe
Economies of scale for underwriting activities