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• An investment banking is a financial institution that raises capital, trades securities and manages corporate mergers and acquisitions.
• Another term for investment banking is corporate finance.
1. Glass–Steagall Act
The Banking act 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall. Glass–Steagall Act was a reaction to the collapse of a large portion of the American commercial banking system in early 1933. It introduced the separation of bank types according to their business (commercial and investment banking), The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and/or an insurance company.
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2.The Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. For example, Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup. Large financial-services conglomerates combine commercial banking and investment banking, and sometimes insurance. Such combinations were common in Europe but illegal in the United States prior to passage of the Gramm-LeachBliley Act of 1999. The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999
List of invest bank
Bank of America (Bank of America Merrill Lynch) Barclays (Barclays Capital) BNP Paribas (BNP Paribas CIB) Citigroup (Citi Institutional Clients Group) Credit Suisse Deutsche Bank Goldman Sachs JPMorgan Chase (J.P. Morgan Investment Bank) Morgan Stanley Nomura Holdings Inc UBS (UBS Investment Bank) RBS (RBS Global Banking and Markets) Wells Fargo Securities
Large financial-services conglomerates combine commercial banking and investment banking, and sometimes insurance
ABN Amro Bank of Montreal (BMO Capital Markets) BNP Paribas (BNP Paribas CIB) Fortis HSBC ING Group KBC Bank Kotak Mahindra Bank Nomura Securities Co. Royal Bank of Canada (RBC Capital Markets) Royal Bank of Scotland Group (RBS Securities) Standard Bank Standard Chartered Bank
Evolution of investment banking in India of investment banking in India can be The origin
traced back to the 19th century when European merchant banks set-up their agency houses in the country to assist in the setting of new projects.
In the early 20th century, large business houses followed suit by establishing managing agencies which acted as issue house for securities, promoters for new projects and also provided finance to Greenfield ventures. A few small brokers also started rendering Merchant banking services, but theirs was limited due to their small capital base.
It was soon followed by Citibank, which started rendering these services. The banking committee, in its report in 1972, took note of this with concern and recommended setting up of merchant banking institutions by commercial banks and financial intuitions. State bank of India ventured into this business by starting a merchant banking bureau in 1972. In 1967, ANZ Grindlays bank set - up a separate merchant banking division to handle new capital issues.
By 1980, the number of merchant banks rose to 33 and was set-up by commercial banks, financial institutions and private sector. JM finance was set-up by Mr. Nimesh Kampani as an exclusive merchant bank in 1973. In 1972, ICICI became the first financial institution to offer merchant banking services.
A cti ti s o f i ve stm e n t vi e n b a n ki g n
ACTIVITIES OF INVESTMENT BANKERS
Underwriting (Public offering of securities) Trading of Securities Private Placement of Securities Mergers and Acquisitions Merchant Banking Securitization of Assets Trading and Creation of Risk Control Instruments Money Management
• Public offering of securities.
• Helping firms raise funds thru stocks or bond issues.
• It is a traditional activity -"sponsoring.“
advising the issuer on the terms (what type and how much) and timing of the offering a kind of insurance
ØIBs buy securities from issuers and re-sell them to customers. ØIf demand is lower than expected, IBs take loss. Ø
Making a market afterwards:
Ø IBs may act as a dealer later, giving the issue extra liquidity.
Ø Investors are more willing to buy the issue if they know there will be a market later.
Sales and distribution:
Trading of Securities
The trading arm of an investment bank provides important input for the pricing of a security, the selling of the issue, and the subsequent liquidity for the issue. IBs must take a principal position in a transaction. Revenue from trading is generated via
Ø bid-ask spread, and Ø appreciation of the price of the securities held in inventory
Private Placement of Securities
Investment banks assist the placement of securities with a limited number of institutional or wealthy individual investors. Fee for private placement: Size (in million) fee
$ 5 - 10 10 - 15 25 - 50 over 50 1.5 - 4.0% 1.0 - 3.0% 0.7 - 2.0% 0.5 - 1.5%
Mergers and Acquisitions
investment banking in M&A
Øvertical merger Øhorizontal merger Øuse for excess cash/way to expand Øfind undervalued business (bad management?) Øaccess to another market
acquiring firms or target firms with respect to price and nonprice terms of an exchange or help target firms fend off an unfriendly takeover attempt. acquiring firms in obtaining financing.
banking refers to a transaction in which an investment banking firm commits its own funds by either taking an equity interest or creditor position in companies. An example is bridge financing wherein an investment banking firm loans funds to a client to consummate a takeover. Bridge financing is not only important for its potential source of interest income, but also to attract clients who are considering an LBO.
Securitization of Assets
of assets refers to the issuance of securities that have a pool of assets as collateral. Citibank and Cheung Kong Holding's Mortgage-backed securities. from securitization:
ØThe underwriting of an issue ØPrice difference
Trading and Creation of Risk Control Instruments
are risk control instruments which an investment banking firm creates for its clients and in which it acts as a counterpart to the agreement. Examples of contracts that can be used to control risk for both investors and issuers include futures, options, interest rate swaps, and customized interest rate agreements. Risk control instruments are also used by
banking firms have created subsidiaries that manage funds for either individual investors or institutional investors such as pension funds.
• Investment banking firms are facing competition from:
Ø Commercial banks with the virtual elimination of Glass-Steagall Ø New trading technology that is allowing institutional investors to execute trades without employing investment banking firms as intermediaries. Ø Direct purchase by institutional investors of publicly registered securities from issuers. Ø some of the more sophisticated corporations themselves who are establishing in-house groups to perform some of the activities traditionally
Size of industry
Global investment banking revenue increased for the fifth year running in 2007, to $84.3 billion. This was up 22% on the previous year and more than double the level in 2003. Despite a record year for fee income, many investment banks have experienced large losses related to their exposure to U.S. sub-prime securities investments. The United States was the primary source of investment banking income in 2007, with 53% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 32% of the
Pre se n te d b y K e ta n J i an
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