HISTORY OF INVESTMENT BANKING
HISTORY OF INVESTMENT BANKING
Investment banking pertains to certain activities of a financial services
company or a corporate division that consist in advisory-based financial
transactions on behalf of individuals, corporations, and governments.
Traditionally associated with corporate finance, such a bank might assist
in raising financial capital by underwriting or acting as the client's agent
in the issuance of debt or equity securities. An investment bank may also
assist companies involved in mergers and acquisitions (M&A) and
provide ancillary services such as market making, trading of derivatives
and equity securities, FICC services or research (macroeconomic, credit
or equity research). Most investment banks maintain prime brokerage
and asset management departments in conjunction with their investment
research businesses. As an industry, it is broken up into the Bulge
Bracket (upper tier), Middle Market (mid-level businesses), and boutique
market (specialized businesses).
Investment banking taken generally to mean the financing of long-term
capital needs, came into being with the merchants of medieval trade
routes. In almost all developed economies of the world, even those
developing late in the nineteenth century, investment bankers emerged
from merchant banking roots. The provision of investment banking
services has come from a variety of institutions over time and across
countries. Products and services have evolved to include complex, often
derivative, securities; and the legal regulation of investment banking has
often changed abruptly, particularly in the last 100 years. Thus, even
well-known investment banking names that have endured over the
centuries bear little resemblance to their ancestors.
The Great Depression was a difficult time for investment banks, some of
which were forced to merge to survive. The crash also triggered more
stringent regulation for the industry, including the famous Glass-Steagall
Act of 1933 which required the separation of commercial banking from
investment banking. JP Morgan for instance was forced to spin off its
securities underwriting division to form Morgan Stanley & Co as an
independent investment bank.
The biggest hit to investment banks since the Great Depression was
brought by the speculative bubble in housing prices, as well as
overreliance on sub-prime mortgage lending which damaged financial
institutions globally.
Among the investment banking victims of the global financial crisis were
Bear Stearns and Lehman Brothers. On the other side of the Atlantic, the
UK government was forced to bail out Royal Bank of Scotland and
Lloyds, while Barclays turned to the Middle East to raise capital privately.
Still, despite the heavy hit from the financial crisis, trust in the investment
banking industry has started to creep back. Investment banks are also
seeing their profits rise, benefitting from the M&A frenzy seen in the past
few years, which is now soaring to pre-crisis levels. And while even the
best of experts would have a hard time predicting where the industry is
currently headed, if the seemingly cyclical history of investment banking
is anything to go by, then another golden age might as well be on the
cards.
The history of investment banking suggests that the industry was built on
quicksand, with many regulatory changes based on the dominant
economic school of thought at different periods of time. Today, rule of the
financial system seems to go to those who most quickly adapt to
customers’ needs.
Customers’ new habits are leading to a digital era in banking. As BBVA
CEO Carlos Torres affirmed, the arrival of new players with superior
value propositions and lower operating costs, like fintech firms, is
threatening banks’ hegemony. It will be those who best adapt to this
digital environment who will take the throne in the next financial
scenario.
