Trends in investment banking Deregulation In the United States: Gramm-Leach-Bliley Act of 1999 . It allows securities firms, banks and insurance companies to affiliate with each other. As a result, banks may offer credit and investment banking services, and competition is tougher. Following Gramm-Leach-Bliley, there is a trend toward consolidation in the industry. Ex: Citigroup 1

In Europe, the EMU (European Monetary Union) has reduced transaction costs, with less currency uncertainty, lower interest rates and more transparency. Since the EMU, there has been a dramatic increase in underwriting services and mergers and acquisitions. In Japan, reforms have deregulated financial products, promoted free competition, removed trading restrictions, and enhanced transparency. Reform of Chinese financial markets. 2

Following scandals, the US congress passed the Sarbanes-Oxley Act 2. New regulation Following scandals, the US congress passed the Sarbanes-Oxley Act (2002): Auditor rotation every five years Provisions on analysts conflicts of interest: -Restrictions on prepublication approval of analysts reports -Protects analysts from retaliation following an unfavorable report 3

Mergers and acquisitions across borders 3. Globalization - Citigroup, JP Morgan, Morgan Stanley, Merrill Lynch and Goldman Sachs have operations in almost every countries with significant capital market activities Underwriting syndicates are international, and equity issuances attract investors from all over the world Mergers and acquisitions across borders 4

- More customers conduct stock or bond trading online. 4. New technologies - More customers conduct stock or bond trading online. - IB have improved efficiency by presenting reports online. - Faster computers have fostered the design of new securities. - The settlement cycle of securities trading is shorter 5

Worldwide market Americans dominate the market Europeans are runner up Among Europeans, first are Germans/Swiss banks Then UK 6

Investment banking in the US 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). 7

Investment banking in the UK 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 8

The US had deregulated fees in 1975 Problems 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 9

The failure of UK 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 10

Ambitions higher than financial and managerial capabilities Reasons for UK failure Ambitions higher than financial and managerial capabilities Lack of shareholder support Only few independent investment banks survived (Cazenove, Lazard, Rotschild) 11

Huge profits in the US market allowed cross-subsidisation in Europe Reasons for US success 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 12