1. Chapter Five Investment Banking

2. Investment Banking Activities Accepting Corporate finance Securities trading Investment management Loan arrangement Foreign exchange

3. Accepting A bank’s signature is put on a bill of exchange to give it a better credit quality The bill of exchange is a promise to pay a trade debt. If the bank is on the central bank’s list for this purpose, the bill is a bank bill. Others are trade bills The bill is frequently sold at a discount Commercial banks will accept bills, too, but historically, it is an investment bank activity

4. Corporate Finance Corporate finance is likely to be a department of major importance in any investment bank. This department will manage: New issues, e.g.; equities/bonds Rights issues Mergers and acquisitions Research

5. Top Global M&A Advisers, 2011 Adviser Deal value (Volume) $bn _________________________________________________________ Goldman Sachs 542 JP Morgan441 Morgan Stanley 427 Credit Suisse 340 Barclays Capital320 Bank of America /Merrill Lynch313 Citigroup284 Deutsche Bank240 Lazard Ltd227 UBS AG 205 ____________________________________________________________ Source: Bloomberg (2012) Global Financial Advisory Mergers and Acquisitions Rankings

6. Securities Trading While corporate finance department deal with primary market new issues and rights issues. Securities trading takes us into the secondary market dealing in the same equities and bonds The trading will take place in one of the modern dealing rooms, with computer terminals and communications giving up-to-the-minute prices and contact with other dealers and investors all over the world The dealings will cover domestic bonds and equities and international bonds and equities

7. Investment Management The investment funds these managers control may be the bank’s own funds or they may be, in effect, ‘looking after other people’s money’. These may be: High net worth individuals Corporate clients Pension funds Mutual funds

8. Regulation Glass-Steagll Act of 1933: This introduced a deposit protection scheme, gave the Federal Reserve Bank greater powers of supervision and separated commercial and investment banking Ariticle 65 of the Japanese Exchange and Securities Code From 1987 onwards, there were several abortive attempts to repeal Glass-Steagall and it was finally repealed by the Gramm-Leach-Bliley Act of November 1999

9. Regulation (cont.) As a consequence of this deregulatory process, the largest commercial banks have transformed themselves into full- service financial firms offering a full range of investment banking services operating as universal institutions Banks became much more reliant on securities market activity to generate income and this fuelled the securitization trend – particularly for mortgage-backed securities products. This, in turn, fuelled property prices, which encouraged more mortgage lending funded by the issuance of increasingly complex mortgage-backed securities (including collateralized debt obligations)

10. Investment Banking and Crisis Nowadays, the obvious consensus is that the increasing integration of commercial and investment banking, and the increased importance of markets, have led to too much risk – in fact a systemic collapse, which nobody seemed to be able to predict The 2010 Dodd Frank Act in the US introduced the so- called Volcker Rule that prohibits commercial banks from high risk investment banking including proprietary trading and limits to investments in hedge funds and private equity. Similar (ring-fencing) restrictions proposed by the UK Vickers Commission in September 2011 and by the EU’s Liikanen Report (2012)