The Global Financial Crisis and The Regulation of Investment Banks

There are various categories of banking; these include retail banking, directly dealing with small businesses and persons. Commercial and Corporate banking which offers services to medium and large businesses (Koch & MacDonald 2010). Private banking, deals with individuals, offering them one on one service. The last category is investment banking. These help clients to raise capital and often invest in financial markets. Most global banking institutions provide all these services combined. With all these institutions in existence within the same localities and offering similar services, there is a need to regulate the industry so as to protect the consumer and provide fair working environment for all banks (Du & Girma, 2011).

Investment Banking is now at a crucial junction, where Investment and Commercial Banking are splitting up due to the ring fence which is being built around these two banking areas. As well, the new upcoming regulation, Basel III, will have a huge impact in the investment banks, with higher liquidity and capital requirements, in order to increase solvency and stability in financial industries.

The recent financial crisis has a huge impact on systemic Important Financial Institutions; it’s distressing effect can be felt in almost every business area and process of a bank. A fairly large literature investigates the impact of financial crisis on large, complex and interconnected banks. The great recession did affect banks in different ways, depending on the funding capability of each bank. Kapan and Minoiu (2013) find that banks that were ex ante more dependent on market funding and had lower structural liquidity reduced supply of credit more than other banks during crisis. The ability of banks to generate interest income during the financial crisis was hampered because there was a vast reduction in bank lending to individuals and

The investment banks, and subsequent stock brokerage firms, was regulated by the Security and Exchange Commission. The banking entities, in this portion of the financial sector, were used to dealing in high risk business that were structured on the business’ equity and debt capital, instead of the commercial banks’ deposits of customers. The activities in this sector of the financial system were underwriting stocks and bonds, insurance markets, the investments in subprime debt markets and mortgages.

Investment banking is mainly involved in the underwriting of securities issued by clients. Investment banking serves different purposes, serving individuals, corporations and governments. They are involved in IPOs where firms are helped to go public whilst also facilitating mergers and acquisitions. Furthermore, investment banking helps in debt finance, this involves lending money to firms to restructure, buy assets or carry out acquisitions.

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

Part 1: Assessment of Current State of U.S. Banking System and Global Economy ................. 3

The Reagan Administration of the United States began a thirty-year-period of deregulation by the legislators in the financial system. Deregulation allowed the financial sector more freedom and less discipline, which provided more opportunity for profit and risk. Reflecting the profit growth resulting from deregulation, investment banks went from small, private firms to public companies. To illustrate the growth of the financial sector beginning in the 1970s and continuing into the early 2000s, consider this - from 1978-2008 the average salary in the United States in every profession other than investment banking rose by 25% and the average salary in investment banking rose by 150%.

Banking crisis has been much more frequent than any of the expectations by research or any of the banks. The annual probability of a crisis has been judged to be around 4-5% in both the industrial sector and emerging market countries (Walter, 2010). The banking sector has been effected by many factors which contributes to its vulnerability. Some of the factors that adds to the vulnerability of the bank are minimum availability of high-quality capital, lack of high quality liquid assets, and sources for reliable funding.

Further, Acharya et al. (2014) develop a model, which sees banks overleveraged because they invest too much in low risk-weighted instead of diversifying the risk. Korte and Steffen build on this model to develop their hypothesis for the research paper.

The Dictionary of Banking and Finance characterizes “Investment Banking” as a term utilized as a part of the US to mean a bank, which bargains with the guaranteeing of new issues and prompts partnerships on their budgetary undertakings. The proportionate term in UK for such capacity is “Issue House”. A more extensive definition is given by Bloomberg, which characterizes a speculation bank as a budgetary go-between that performs a mixed bag of administrations incorporating supporting in the offer of securities, encouraging mergers and other corporate rearrangements, going about as specialists to both individual and institutional customers and exchanging for its own record. Speculation Banking has developed to include a critical place in the field of money related administrations in India in the changed period.

Critically evaluate the role of investment banks in the process of financial intermediation. Your analysis should consider the users and providers of funds. You should support your analysis by using academic sources as well as relevant data and charts taken from Bloomberg.

Raising Capital and Security Underwriting: One function of an Investment Bank is to package and issue securities for sale to clients, companies or the general public. An investment bank would for example facilitate the sale of shares of a previously private company that would like to go public and offer those shares for sale to investors on an open market. The investment bank would determine the value of the security and the underlying risk of the asset in order to sell it at an

investment banks and merchant banks. Specialise in the provision of off-balance-sheet advisory services such as providing advice on mergers and acquisitions, balance sheet structuring, risk management

During the past three decades dramatic changes in the global financial landscape and the science and art of macroeconomic theory and macroeconometrics have begun to influence