The Financial Services Industry: Securities Firms and Investment Banks Chapter 4 The Financial Services Industry: Securities Firms and Investment Banks
Overview In this segment ... Securities Firms and Investment Banks: Activities of securities firms and investment banks Size, structure and composition Balance sheets and recent trends Regulation of securities firms and investment banks Global issues
Securities Firms and Investment Banks Nature of business: Underwrite securities. Market making. Advising (example: M&A, restructurings). Growth in mergers and acquisitions: Less than $200 billion in 1990. $1.83 trillion in 2000 Decline in 2001
The Largest M&A Transactions
Size, Structure and Composition Dramatic increase in number of firms from 1980 to 1987. Decline of 24% following the 1987 crash, to 2000. 1987: Salomon Brothers held $3.21 billion in capital. 2000: Merrill Lynch held capital of $19.3 billion. Many recent inter-industry mergers (i.e., insurance companies and investment banks). Role of Financial Services Modernization Act, 1999
Types and Relative Sizes of Firms National full-line firms are largest. National full-line firms specializing in corporate finance are second in size. Remainder of industry: Specialized investment subsidiaries of BHCs. Discount brokers. Regional securities firms (subdivided into large, medium and small). Specialized electronic trading securities firms
Top U.S.Underwriters, 2000
Key Activities Investing Investment banking Market making Trading Activities related to underwriting and distributing new issues of debt and equity. Market making Trading Position trading, pure arbitrage, risk arbitrage, program trading
Key Activities (continued) Cash management Assisting with mergers and acquisitions Back-office and service functions.
Trends Decline in trading volume and brokerage commissions particularly since crash of 1987, although some recovery since 1992. Record volumes 1995-2000. Decline in underwriting activities over 1987-90. Resurgence in activity and profitability 1991-2000.
Trends (continued) Increases in holdings of fixed-income trading greater interest rate and sovereign risk exposure Pretax profits soared to $21.0 billion in 2000 curtailed by economic slowdown and September 11 attacks 1987: Federal Reserve allowed BHCs to expand securities underwriting. Prohibited since 1933 under Glass-Steagall Act.
Balance Sheet Key assets: Key liabilities: Long positions in securities and commodities. Reverse repurchase agreements. Key liabilities: Repurchase agreements major source of funds. Securities and commodities sold short. Broker call loans from banks Capital levels much lower than levels in banks
Regulation Primary regulator: SEC Reiterated by National Securities Markets Improvement Act (NSMIA) of 1996. Prior to NSMIA, regulated by SEC and states. Regulate trading activities such as shelf registration Day-to-day trading practices regulated by the NYSE and NASD.
Investor Protection & Other Monitoring Securities Investors Protection Corporation (SIPC). Protection level of $500,000 Federal Reserve also has role in overseeing securities firms and investment banks Vulnerability of the financial system Issue of timely settlement
Web Resources For details of regulation of securities firms and investment banks, visit: SEC: www.sec.gov NYSE: www.nyse.com NASD: www.nasd.com SIPC: www.sipc.org Web Surf
Global Issues Growth in securities trading and underwriting is a global event Other countries were not encumbered by regulations such as Glass-Steagall Act Foreign banks operating in the U.S. compete with U.S. commercial and investment banks
Pertinent Websites Federal Reserve: www.federalreserve.gov NASD: www.nasd.com NYSE: www.nyse.com SEC: www.sec.gov Securities Industry Association: www.sia.com SIPC: www.sipc.org The Banker: www.thebanker.com Thompson Fin. Securities Data: www.tfsd.com Web Surf