Lessons of GFC for the regulation of Investment Bank
Investment Banks enable individuals, institutions such companies, governments to raise capital by offering underwriting services or working as an agents of the client in offering securities or in both roles. Investments banks play a very important role in stimulating investments in the United States both from individuals and corporate.
The global financial environment has over the last decade experienced enough changes as can be witnessed from the key economic indicators. These changes have significantly impacted various stakeholders such as financial markets, money markets, capital markets and the general micro and macro economics ...view middle of the document...
The global financial crisis affected almost all businesses but the ones in the financial sector were hit the most. For example mortgage companies that had advanced money to purchase the subprime propertied were hit by customers’ defaults. This led to the loss of their assets value. Some financial institutions were so hard hit that the respective governments rationalized them to prevent their eminent collapse. The effects also affected other business in terms of the increased interest rates on lending and decrease in their capability to access credits.
Because of these changes in the financial environment, various legislations have been enacted both on global, regional and country scale in order to reduce the level of exposure to such events. For example, Basel II was enacted to guide the banks on the amount of the capital they should hold.
Following the global financial crisis, it has been very important to continue implementing necessary changes within the global corporate and investment banking industry. Thus there has been a huge effort towards the general banking reform and in particular reforms pertaining the investment banking fields and their operations. Many new regulations have been put in place both in Europe and United States to govern the day to operations of the investment banks and try to minimize chances of having future financial crisis.
The industry of investment banking is quite dynamic. The investment banking industry in the United States has seen dramatic changes since 2008 following the global financial crisis. For example out of the top five investments banks in US, three have disappeared while Morgan Stanley and Goldman Sachs changes have since changed their assets from being pure investment banks to being financial holding companies. The changes in their business plan are aimed at strengthening their capital base and at the same time increase their liquidity ratio. This is aimed at ensuring that the investment banks are able to carry their investment and advisory services within the required liquidity proportion at all times. This makes these banks to become more prepared to face all the uncertainties in the future operating environment (Podoliakova, 2012).
The investment banks changed some of the products that they were offering to the market especially those which were considered highly risky. These are the products which were blamed as have led to increased speculations among the consumers. For example some of the derivative products that were in the market prior to the financial crisis have since been discontinued because they were highly risky and that over exposed the banks to higher level of risk.
Lessons of Global financial Crisis for the financial products created by investment Banks.
As mentioned above, some of the products that were being offered by the investments banks prior to the global financial crisis overexposed them to financial risks such liquidity risk. For an investment banks to be successful,...