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Today, UBS announced a massive downsizing of its investment bank. Other banks are in the same process of will follow. This is a logical consequence after various of the investment banks had reached a "bubble stage" prior to the financial crisis. Excesses happened in an environment of governmental regulation of the US real estate market and weak governance of various banks. The current process will not at all be the end of investment banking. In contrary, firms from main street (as opposite to Wall Street) are in urgent need of services which help them to finance projects, to get advice in acquisitions and capital market transactions, to make optimal use of the financial resources etc. Downsized and less risky investment banks can be a more reliable partner in this respect.
MarketObservation: Nature of investment banks today and in the future, October 11, 2007:
Banks such as UBS have lost billions in the subprime mortgage crisis. This business was done out of the investment banking departments of such banks. It is questioned again whether it could make sense to spin off investment banking from large banking conglomerates as they might have a negative impact on overall risk-adjusted value of such conglomerates.
It is argued that the break up value of a bank such as UBS might be substantially bigger than the current market capitalization of the bank. When thinking about such scenarios it is also important to look at the nature of todays large investment banking operations. They are not homogenous at all within themselves. The investment banking business is a combination of highly computerized, scaleable businesses and businesses where tacit skills are highly important (e.g. M&A deal making). When discussing possible investment banking spin offs from banking conglomerates a differentitated view, looking at the various risk profiles of investment banking businesses, should be taken.
Attached article provides a valuable overview of the current nature of investment banking operations:
Key conclusions are:
Author's guess about the future:
"The central concept of an investment firm is fuzzier than might immediately appear. Why do investment firms exist at all? What should be the range of their activities? This exploratory study investigates forces which shape the boundary of the investment firm by analyzing firms in the Private Equity industry. The PE industry offers a rich ground for research, given that substantial parts of the PE universe have been rapidly migrating from traditional single-product PE firms towards multi-business investment firms. Based on interviews with senior investment professionals and executives from leading PE firms and based on case studies, I find that the boundary of the firm is determined by the trade-off between expansion enhancers, in particular ‘deal sourcing advantages’, ‘capital sourcing advantages’, ‘procurement cost advantages’ and ‘information sharing advantages’, and expansion inhibitors, particularly ‘conflicts of interest’, ‘asset allocation authority’, and ‘parenting disadvantages’. Moreover, I speculate that if the new generation of multi-business investment firm models succeeds, they may fill the gap which most recent regulation has created in the commercial and investment banking industry, given that multi-business firms are not scrutinized to the same extent."
Keywords: Private Equity, Multi-Business Investment Firm
Selected other MarketObservation posts about investment banking in the past:
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