Future of Investment Banking
Future of Investment Banks is extremely relevant topic for today’s studies. This type of banks institutions plays one of the main roles, being circulating element in the whole body of financial system. Vital role guaranteed by the abilities to help clients to raise capital through debts, equity or other potential deals. Needless to note that investment banks are those privileged institutions that are involved in processes of mergers and acquisitions. Concern about future of such an important investment banks are brought up by relatively recent events in bank sector of the economy.
Even when BNP Paribas signaled that they had problems with properly pricing its book of subprime related bonds, a lot of experts were starting to worry. Chain of events is noticeable because of Lehman Brothers’ collapse as well.
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And nowadays questions of the development perspectives of investment banks increased dramatically. In attempts to describe possible development perspectives of investment banks, following picture can be drawn. First of all, it’s given that quantity of “investment banks” already decreased.
It’ better to describe it as consolidation process with a lesser amount of big banks and more small boutiques. Acquisition of JP Morgan in massive less effective structure proves this argument. Second, the problem of maturity gap should be solved. Dealing with asymmetric by the means of Repurchasing Agreements is not acceptable anymore due to the lack of trust. Moreover, asset/liability mismatch is risky and hard to control. Therefore it’s important to relay on long-term funding such as deposits. The next gesture of brush is certainly about the regulation issue.
Industry experienced some sort of deregulation caused by Gramm-Leach-Bliley Act, which had replaced Glass-Steagall Act. Thus, commercial banks with more conservative structure noticeably had gotten closer to investment banks with all their risk-taker items. Good example is illustrated by Citigroup, where blend of banking, security and insurance may be observed. Separation should be supported for the purpose of avoiding conflicts of interests which incurred in internal environment of financial institutions.
Next thing to observe in order to fulfill the forecast of development perspective of investment banks has to deal with bonuses in sector. There are no doubts, that people who worked on the field of investment are really hard-working folks, dedicated to their job more than ten hours a day including weekends. Nevertheless, they play with “other people’s money” which imposes responsibilities that cannot be overestimated. It means that extensive impact may occur in case of unsuccessful activities but not for the trader.
Bonuses should be limited. Motivation program should involve not only bonuses for profits but also some sort of provisions/allowances in undesirable case of losses. Discretion will inevitably lead to more risk aversion behavior. Actually, risk conservative approach is required all around banking due to elimination of the financial crisis threats. Before summing up, all the activities, that should be done for the future of the investment banks, there is one thing that will occur no matter what.
It is something about experience that of course deserves to be thought of. Lessons learned from the significant episodes of financial crisis are really valuable. People will become more rational, especially in terms of dealing with unknown instruments like CDOs, CDO^2s and others. Arguments presented in this paper are supposed to support the idea of investment baking’s evolution. Despite the common concerns, the industry will survive, because of the never-ending demand of raising money