For those unfamiliar with "investment banking", the field is an area of banking which helps companies acquire funds. In addition to helping companies get the funding they need, the area of
investment banking also includes consulting or advising on financial transactions a company may engage in (mergers, acquisitions, etc). An investment bank may find funds through the capital market or through
venture capital or private equity.
In the past, a bank could either choose to be a commercial bank or an investment bank. A commercial bank is one which collects deposits from clients and issues loans directly to businesses or individuals. Up until the
Gramm-Leach-Bliley Act in 1999, it was illegal for a bank to have both commercial and investment practices. However, today it’s perfectly legal. As this deregulation occurs, banks are allowed to venture into more and more sectors.
Recent changes with large players like Morgan Stanley and Goldman Sachs is now helping experts recognize new regulatory framework within the financial industry is needed, due to the merging of commercial and investment banking. The famous Gramm-Leach-Bliley Act allowed any and all financial companies to engage in new activities but also allowed them to keep their old activities going. Afterward, the regulatory structure became quite complicated. Retail banks were watched by The Federal Reserve, Wall Street firms were watched by the
Securities and Exchange Commission and insurance companies were watched by state regulators.
Commercial banks began moving into investment banking, at rapid speeds. They were then able to offer cheap loans to borrowers because of their large balance sheets. Wall Street firms began finding means of taking deposits and making loans, without submitting to regulation of the Securities and Exchange Commission.
The ability to merge a commercial bank into an investment bank is one that has led to a questioning of viability of the traditional stand-alone investment bank. The current financial situation of America makes it difficult for Wall Street firms to hide their vulnerabilities. They have smaller balance sheets and since they rely on wholesale markets for funding, they may be in trouble. In fact, many experts believe the separation of
Wall Street brokers from commercial banks may have links all the way back to depression-era legislation. Due to all turmoil, Wall Street firms are also being set under regulation of the Federal Reserve, instead of the Securities and Exchange Commission.
This will lead to stricter regulation regarding risks able to be considered.
Many experts are torn, however. Some argue it’s a difficult time for investment banks while others say the disappearance of some of the main players are only opening up opportunities for those remaining. The latter group argues that capital markets are going nowhere. Thus, the investment business will always remain. The only unarguable challenges today’s investment banks certainly face are capital and liquidity.
While most investment industry experts agree the sector will continue successfully, they do agree many changes will be put into place. Not only will Wall Street firms be regulated differently, but other changes will occur due to the credit sector’s depletion. While brokers may still be in business, their duties and actions will change as a direct reflection of the credit market and the American economy as a whole.
Meanwhile, colleges across the country are still toting investment banking as a prime area to dive into. Many business students are still vying for important jobs within the sector and planning for long careers in investment companies. The fact is, America will always require the area of banking for companies who need consultations on mergers and for those who need funding assistance.
Resources:
www.ft.com
www.economist.com
