Merchant Banking (MB) Vs.

Investment Banking (IB)

MB & IB are the function of intermediation in the capital market. But There is thin line between the two.

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MB consists of Assisting issuers (Companies) to raise capital by placement of securities issued by them with the investors. The MBer has an onerous responsibility towards the investor who invest in such securities. MB is a fee based service for management of public offers, popularly known as Issue Management and for private placement of securities in the CM. In India MBer is also called as the Lead Manager

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IB encompasses not merely MB but other related capital market activities such as Stock Trading Market Making Underwriting Broking Asset Management. Besides above IBers also provide Specialized corporate advisory services Business and financial advisory M & A.

Evolution of American Investment Banks

At the end of World War I CB in USA were ready for economic recovery. American companies started reducing their dependence on CB and concentrate on stock and bond market because of cheap availability of funds. CB started acquiring stock broking business National City Bank of New York acquired Halsey Stuart and Company in 1916. The stock and bond market boom of the 1920s was an opportunity that banks could not miss. They did through affiliates that is Holding co.

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While the boom lasted, IB affiliates made huge profits as Underwriting fee. National City Bank, Chase Bank, Morgan and Bank of America were the most aggressive banks. In order to restore confidence in the banking and financial system, several legislative measures were proposed, led to the passing of the Banking Act 1933 ( popularly known as the Glass Steagall Act ). It restricts CB from engaging in securities underwriting or acting as agents for others in securities transactions.

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on the other hand, Investment Banks were BARRED FROM DEPOSIT TAKING AND CORPORATE LENDING WHICH WERE CONSIDERED THE EXCLUSIVE BUSINESS OF CB. Since the passing of the Act, IB became narrowly defined as creating PRIMARY MARKET FOR SECURITIES AND SECONDARY MARKET MAKING THROUGH SECURITIES DEALING.

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By 1935, IB became one of the most heavily regulated industries in USA. After the passing of the Glass-Steagall Act of the 1930s until the beginning of the 21st century IB had been through several phases of transformation. In 1973, world economy was under pressure and inflation (due to high oil prices), IB and CB operations were relaxed. Securities Acts Amendments, 1975 which had CB to have subsidiaries (called section 20 subsidiaries )that were allowed to underwrite and trade in securities. In 1990, J.P. Morgan was the first bank to open a section 20 subsidiary.

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During the economic growth and globalization of the 1980s , IB expanded to several new areas and services which included Currency trading Real estate Financial futures Due to the technological advancements in 1990s and the availability of global access through communication technology, IB is no more restricted to underwriting and security dealing. The shift is more towards advisory services, M & A, providing expertise in new products and sophisticated techniques for structured financial deal making.

European Investment Banks

In continental Europe (excluding UK), the concept Universal Bank has been operational. universal Bank meant that co-existence of commercial banking (lending activity) along with investment banking (investment and distribution activity )

European Investment Banks.

The UK considered as Europes largest investment banking market. The oldest merchant bank in London was Barings Brothers which had played a prominent role in the 19th century. Security distribution was the function of stockbrokers, secondary market trading was held by jobbers and advisory services were provided by merchant banks. in 1986, The US investment banks with their integrated global business entered UK and Europe and later into Japan.

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Post 1986, there was a sale of SG Warburg, the leading merchant bank, to Swiss Bank Corporation. Morgan Grenfell, a merchant bank was sold to Deutsche Bank in 1990. In 1997, Natwest Bank and Barclays Bank exited investment banking business. Then Deutsche Bank acquired Bankers Trust.

Global Industry Structure

The investment banking industry on a global scale is oligopolistic in nature ranging from the global leaders ( known as Global Bulge Group) to pure investment banks. The top ten global firms of their fee billings as in 2001 :

1. Merrill Lynch 2. Goldma n Sachs 3. Credit Suisse First Boston 4. Salmon Smith Barney

9% 7.5% 7.2%

6.7%

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5. Morgan Stanley 6. J.P. Morgan 7. UBS Warburg 8. Lehman Brothers 9. Deutsche Bank 10. Bank of America 6.3% 5.5% 4.6% 3.6% 3.5% 2.4%

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Within the listing given in the table are the top pure investment banks which do not have commercial banking connections, which are Merrill Lynch, Goldman Sachs and Morgan Stanley. Listed therein are also the leading European Universal Banks that are called so due to their role in both commercial and investment banking.

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1. 2. The five leading universal banks in the world are : Citigroup (US) : Citibank, Salomon Smith Barney (investment bank), Schroders. CSFB (Swiss) : CSFB, Donaldson, Lufkin&Jenrette, Pershing Deutsche (German) : Deutsche Bank, Morgan Grenfell, Alex Brown, Bankers Trust J.P. Morgan (US) : J.P. Morgan Chase, Chemical Bank, Beacon Group, Robert & Fleming, Hambrecht & Quist UBS Warburg (Swiss) : UBS Warburg, Dillion Read, Paine Webber, Philips & Drew, Swiss Bank (merged).

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