Organization & Operation of International Investment Bank Essay
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Nowadays, banks seem to be springing up in the nooks and corners of every city in every country. The banks are no longer operating globally, in fact most of the big banks have marked their presence in most of the continents and yet they keep on expanding their business. There was a time when banking only meant providing loans to people or keeping their deposits but this is not the case anymore. Many different kinds of banks have sprung up offering diversified financial service that provide clients with investment and insurance products but the major ones are the commercial banks and the investment banks.
The banks not only offer services to the customers and make their own money in the process but are in fact a vital part of the economy and its development as well. The purpose of the study is to make an analysis of the role played by investment banks; through their importance will come to light. The study will also be discussed with respect to the working of these bodies internationally.
Introduction: The study deals with investment banks it is important to know how these institutions are different from commercial banks.
Commercial banks are those institutions which accept deposits, provide business loans, and also offer other relevant services. Besides, they also provide the facility of making a variety of deposits through accounts like checking, time deposits or savings (Harvey, 2004). The purpose of existence of these institutions is to make a profit and the owners are a group of individuals, of whom some may belong to Federal Reserve System. Though the commercial banks provide services to individuals or clients, but their prime concern is to receive deposits and lend to businesses.
An investment bank perform a range of tasks including issuance of securities (underwriting), management of portfolios of financial assets, trading securities (stocks and bonds), helping investors in buying securities and providing financial advice and support services; they are also involved in various proprietary functions in the financial markets, where they are their own clients (Lim, 26). It is mainly an intermediary who brings together sellers of stocks and bonds with buyers of the same.
It differs mainly from the investment bank in the aspect that it has no inventory of cash deposits unlike a commercial bank. The companies usually use investment banks for achieving the same end as the commercial banks. If capital is required by a company, it may either obtain loan from a commercial bank, or buy equity or debt from investment bank. Commercial banks have availability of funds through depositors unlike an investment bank who, for this reason, have to spend considerable time looking for investors from whom they may obtain capital for clients. Literature Review:
In the earlier days, banks were usually restricted to their local place of origin and only a few large ones had their branches in other countries but during the 19th century it was seen that many small banks failed in trying times for the reason that they were dependant on the fluctuations that local trades and industries went through; on the other hand larger banks which had their branches across the border were much secure as the risks were extended across a larger market and a broader range of borrowers. This is what gave rise and added to the popularity of international banking.
Banks are involved in a wide range of services including the safe keeping of money and its transmission by different means like checks. At a primarily level, a bank takes the money from the customers and undertakes to repay it when demanded or when a prearranged period expires. But the roles of bank are no longer restricted to taking deposits or providing loans, there has been a great change in the nature of banks and their business has become more complicated over the last 20 years and this can be greatly contributed to the addition of various services pertinent to non-banking areas.
This is the reason that major banks have taken control of bodies like merchant banks, estate agencies or hire-purchase companies, and have moved into areas like insurance and leasing (Geoffrey, 38-41). International banks operating overseas often suffer downward rating as seen the course of history that when a country’s creditworthiness is downgraded by international private agencies because of slacking public finances, it is followed by a similar rating of banks issuing shares because they carry large amounts of foreign currency government debt.
The reason for this is that debt carries foreign exchange risk since the country is issuing it in a foreign currency thus increasing the probability of default in case the domestic currency depreciates; the countries who issue Eurobonds exercise acceptable sovereign credit ratings which permits them to float, in international markets, foreign currency bonds that have been underwritten by major international investment banks and carry investment grade AAA.
Funds from the sale of securities return to banks and then may be invested partly in the provision of loans to the private sector or any other asset which carries a lower risk than that of foreign currency government debt (Shaheen & Achkar, 353). A bank should work profitably but by no means it should turn into an organisation that is not trusted by its customers, employees or shareholders.
Most of the customers across the globe consider banks with quiet suspicion and at times even with vocal hostility where they are considered evil and not a valued service industry and there is rarely a day when the tabloid press does not expose some apparent banking bungle or scam. Majority of the banks are bent opon extending their branch network and makreting their products. A customer who is anxious to just perform a simple transaction like cashing a cheque, often find himself/herself in the hands of a bank staff trying to make him go for the product of the week.
The banks are no longer focused on creating a customer-oriented environment that may attract customers but are following the policy of ‘indiscriminate sell’ which are driving out customers. Merely, expanding the branch network in different countries is not enough unless the bank succeeds in establishing a reputation for loyalty and trustworthiness with its borrowers. There are occasionally times when conflicts arise between the interests of a bank and its borrowers, but the key is to maintain mutual respect.
Like the other organizations in service industries, customer satisfaction should lie at the core of a bank’s culture (John, 27). With respect to working of the investment banks, there is great reliance on analysts. These analysts are essential to the organization and working of investment banks. Because of the servies that they provide and avail, investors depend on analysts to perform a skilled analysis of security valuation, as it is usually the art and science which they are unable to perform themselves.
At individual level, these analysts normally give coverage to a group of companies falling within the domain of particular industries. For this reason all major investment banks and even smaller commercial ones have their own teams of analysts who perform essential research on public corporations. These analysts do not contribute directly in generating material revenue for the bank. Instead, their services support two major groups.
The first group is of professional and non-professional investors who give commissions to the banks by means of their orders to buy and sell securities. In this domain, what the analyst does is to spend time talking with investors in order to collect orders from them, which are not directly given to them but instead placed through salespeople working in the bank and with whom analysts keep in touch on a daily basis. The other important group in investment bank is the corporate finance department. This department is the vital contributor to revenues and profits earned by banks.
The majority of revenue earned by the corporate finance is a result of underwriting and arranging financing (debt and equity) and providing services like mergers and acquisitions (M&A) advice to the clients. The role of analysts in Corporate finance lies where they are seeked for the promottion and sale of capital offerings and M&A deals to investors (Hayward & Boeker, 1-5). In the past, investment banks have earned great benefits because of the high demand for its products and many existing macro trends prevalent in most of the countries.
One such example is of disintermediation of traditional capital providers which facilitated the continued developments in the business arena of corporate bond and securitisaties; even on the investment side, there was disintermedation of traditional savings providers like banks or insurance companies, as a result a flood of funds rushed into equity markets which brought the need for execution of advice and transaction; another factor which contributed to the success of investment banks is the globalisation of corporations and investors.
Another positive trend was the effort of continued restructuring by corporations and governments so as to achieve global competitiveness and thus requiring advisory services of the investment banks. The reaction of the banking industry to these trends was the decision to organise itself around the organizations that were product-orientated so as to take advantage of the situation. To put it in other words, the former range of services that were offered and product capability was amplified due to increased product demand (Kauffman & Howcroft, 214).
The international investment banks expanded their network across many countries as result of opportunities that were offered due to structural changes in the economy during the nineties in the form of privatization and ownership reallocation both in the financial and non-financial sectors (Messori 177). The function of international investment banks in terms of the banks’ own business is not awlays and necessarily the desire to be a major force in the retail mortgage market; but sometimes what they are instead aiming for is the building of their securitisation businesses.
By expanding into the mortgage space beyond the local arena, a ready supply of new assets for securitisation become accessible to these banks directly, rather than this that they source loans in the secondary market. The benefit of securitising most of the loans of the bank in the mortgage business originates implies that the investment bank is capable of passing the risk of credit along to investors, and not only this but in turn also earning feed by means of arranging the securitisation transactions(Wood 36). An international investment bank often reaps the benefit of geographical co-location in many of the cases.
The concept behind geographical co location can be illustrated by means of a ‘local code’ which promotes the idea that the knowledge which is specific to a certain place can be best acquired and utilized by marking your presence at that place. When talking of investment banks’ services, let’s say, its M&A advisory service, such transaction requires knowledge that is of a non-cosmopolitan nature, meaning, that the availability of such knowledge is limited, which means that it is pertinent to local market besides being related to the professional knowledge of the international M&A community (Schamp et al. 11- 615).
Methodology: This research is basic in nature and is done to have a better understanding of the investment banks. The qualitative methodology of research has been used and is based on the use of secondary data, which is one that is gathered from existing data sources and has not been done by the researcher himself. For the purpose of collecting data for this research, articles/journals on the subject have been used. The use of secondary data saves time of doing all the research from a scratch and saves cost due to easily available of databases catering to the need and providing relevant information.
The methodology takes effort in identifying the correct data and discarding the irrelevant ones; besides it authenticity may also be questioned at times. Property and validity of data: The data is secondary in nature, and has been obtained through reliable sources like published articles and research journals. The data is valid since it is not obsolete, relevant and authentic. Analysis of findings: Now, we will present an analysis of our findings in light of the literature review.
Expansion banking beyond the boundaries: The workings of banks on an international level has not always been the trend, in fact, the banks usually used to be local and work within limited cities and towns but over time, such banks turned out to be unsuccessful and the counted few ones who operated internationally were seen to be making success. thus the banks saw opportunity in expanding their branches and their network as a whole beyond local boundaries. The reason for the success was that when they operated in diverse foreign markets and dealt with diverse borrowers, the risk was no longer linked with a single market only and was thus reduced.
Rise of investment banking: The traditional functions of bank were limited to making loans and taking deposits and transferring of funds but this is no longer the case. There are banks now providing non-traditional services like leasing, insurance, mortgages. The investment banks became well versed among the masses as a result of diversification of bank services and of the trends that were prevalent in the economy during the 19th century.
These trends among others, included disintermediation of financial services and different restructuring in the economy like privatization or resource allocation among different sectors which facilitated the need for advisory services. Organization of international investment banks: The international investment banks are organized in a manner so as to reap the best benefits from their operation in the international markets. These banks deal with local securities among other things of the countries in which they operate.
This provides them with a better understanding of the local market conditions but at the same time, unlike local banks, they are not oblivious of the international markets and can play smartly in both arenas. But the back draw of this international arrangement is often visible in the form of downgraded rating when the foreign country of their operation is going through some sort of economical crisis but even then this downgrading is better than those of the local investment banks who are purely organized around the local financial instruments in their operations.
The international investments banks are organized in such a way that only makes them visible in the international domain but also provide them with a supply of new assets thus enabling them to pass the credit risk to investors and also to arrange more transactions. Operation of the international investment banks: In the operation of the international investment banks, trust is a crucial element. Banks seem to be more focused on the expansion of their branch network and sale of their products than on building the customers’ trust.
The customers must have the trust that their bank is providing them with the right investment options and that it is equally involved in the risk bore by them; only then can these investment banks operate successfully. The international bank operates through a complicated process but what is important is to know that these banks are dependant to a great degree on their financial analysts. These analysts are not involved in the direct generation of revenue but are in fact the essential elements for providing support to two of the revenue generating bodies, which are the investors and the corporate finance.
The analysts spend considerable amount of time with the investors and give them advices regarding the right place to invest in; with respect to the corporate finance department, these analysts support those working with corporate finance department in persuading the clients into letting the bank handle their buying and selling of securities and other needs and in promoting their services by giving the right check and balance.
Conclusion: Banking is no longer traditional and the former traditional role lies with the commercial banks; the diverse operations have given rise to the investment banks that have expanded their networks internationally and are making success. By operating globally, the investment banks come to terms with the local market conditions which enable them to have a more in depth insight and thus make wise investment decisions and provide the clients with the right options for decision making; the main personnel involved in their operations are their analysts who provide support to the revenue generating bodies of the bank.