INVESTMENT BANKING

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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.

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HISTORY
1. Glass²Steagall Act
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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 Glass² Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall. Glass²Steagall 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. it had a stronger impact on US banking regulation It was established on June 16, 1933

Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup. and sometimes insurance. The Gramm-Leach-Bliley Act (GLBA). Large financial-services conglomerates combine commercial banking and investment banking.. ´ ´ ´ The Gramm-Leach-Bliley Act allowed commercial banks. For example. 1999 . Such combinations were common in Europe but illegal in the United States prior to passage of the Gramm-Leach-Bliley Act of 1999. also known as the Financial Services Modernization Act of 1999 enacted on November 12. securities firms and insurance companies to consolidate.2.THE GRAMM-LEACH-BLILEY ACT ´ History contd«. investment banks.

P. Morgan Investment Bank) Morgan Stanley Nomura Holdings Inc UBS (UBS Investment Bank) RBS (RBS Global Banking and Markets) Wells Fargo Securities .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.

LARGE FINANCIAL-SERVICES CONGLOMERATES COMBINE COMMERCIAL BANKING AND INVESTMENT BANKING. Royal Bank of Canada (RBC Capital Markets) Royal Bank of Scotland Group (RBS Securities) Standard Bank Standard Chartered Bank . 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.

A few small brokers also started rendering Merchant banking services. promoters for new projects and also provided finance to Greenfield ventures. large business houses followed suit by establishing managing agencies which acted as issue house for securities.EVOLUTION OF INVESTMENT BANKINGinvestment banking in India can be traced IN INDIA The origin of ´ 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. but theirs was limited due to their small capital base.

CONTD««. in its report in 1972.up a separate merchant banking division to handle new capital issues. State bank of India ventured into this business by starting a merchant banking bureau in 1972. ´ It was soon followed by Citibank. ANZ Grindlays bank set . In 1967. The banking committee. took note of this with concern and recommended setting up of merchant banking institutions by commercial banks and financial intuitions. which started rendering these services. ´ ´ ´ .

the number of merchant banks rose to 33 and was set-up by commercial banks. financial institutions and private sector.CONTD««. ICICI became the first financial institution to offer merchant banking services. ´ ´ . In 1972. JM finance was set-up by Mr. ´ By 1980. Nimesh Kampani as an exclusive merchant bank in 1973.

Activities of investment banking .

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 ´ .

´ ‡ ‡ . It is a traditional activity -. Helping firms raise funds thru stocks or bond issues.UNDERWRITING Function:‡ Public offering of securities."sponsoring.

 ´ .UNDERWRITING INVOLVES ´ Origination: advising the issuer on the terms (what type and how much) and timing of the offering ´Underwritingµ: a kind of insurance IBs buy securities from issuers and re-sell them to customers.  If demand is lower than expected. IBs take loss.

giving the issue extra liquidity. ´ Sales and distribution:   IBs have built up regular network to sell securities. Often. . Investors are more willing to buy the issue if they know there will be a market later. a syndicate is often organized by the lead or co-lead underwriters (or co-managers) to share the capital risk.CONTD«« ´ Making a market afterwards:   IBs may act as a dealer later.

and the subsequent liquidity for the issue.TRADING OF SECURITIES The trading arm of an investment bank provides important input for the pricing of a security. the selling of the issue. ´ Revenue from trading is generated via ´   bid-ask spread. and appreciation of the price of the securities held in inventory . ´ IBs must take a principal position in a transaction.

5 .0 .0% 0.3.5% .0% 1.5 .7 .PRIVATE PLACEMENT OF SECURITIES Investment banks assist the placement of securities with a limited number of institutional or wealthy individual investors.2.50 over 50 fee 1.4.1.10 10 . ´ Fee for private placement: ´ Size (in million) $ 5 .0% 0.15 25 .

MERGERS AND ACQUISITIONS Role of investment banking in M&A ´ Find M&A candidates: vertical merger  horizontal merger  use for excess cash/way to expand  find undervalued business (bad management?)  access to another market  .

CONTD« ´ Advise 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. Assist acquiring firms in obtaining financing. ´ .

MERCHANT BANKING Merchant 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 ´ Securitization of assets refers to the issuance of securities that have a pool of assets as collateral. Example: Citibank and Cheung Kong Holding's Mortgage-backed securities. Revenue from securitization: The underwriting of an issue  Price difference  ´ ´ .

´ Examples of contracts that can be used to control risk for both investors and issuers include futures.TRADING AND CREATION OF RISK CONTROL INSTRUMENTS There are risk control instruments which an investment banking firm creates for its clients and in which it acts as a counterpart to the agreement. options. interest rate swaps. and customized interest rate agreements. ´ Risk control instruments are also used by investment banking firms to protect their own position in transactions ´ .

MONEY MANAGEMENT ´ Investment banking firms have created subsidiaries that manage funds for either individual investors or institutional investors such as pension funds. .

some of the more sophisticated corporations themselves who are establishing in-house groups to perform some of the activities traditionally done by investment banking firms. .COMPETITION ‡ Investment banking firms are facing competition from:     Commercial banks with the virtual elimination of Glass-Steagall New trading technology that is allowing institutional investors to execute trades without employing investment banking firms as intermediaries. Direct purchase by institutional investors of publicly registered securities from issuers.

with 53% of the total.3 billion. a proportion which has fallen somewhat during the past decade. Asian countries generated the remaining 15%.S. many investment banks have experienced large losses related to their exposure to U. slightly up on its 30% share a decade ago. Despite a record year for fee income. This was up 22% on the previous year and more than double the level in 2003.SIZE OF INDUSTRY ´ Global investment banking revenue increased for the fifth year running in 2007. sub-prime securities investments. ´ . The United States was the primary source of investment banking income in 2007. Europe (with Middle East and Africa) generated 32% of the total. to $84.

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