1. Trends in investment banking
Deregulation
In the United States: Gramm-Leach-Bliley Act of 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

2. 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

3. 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

4. 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

5. - 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

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

7. Investment banking in the US
The modern concept of “Investment Bank” was created by the Glass-Steagall act (Banking Act of 1933). Following the 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

8. 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

9. 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

10. 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

11. 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

12. 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