MB102 Principles of Investment Banking

INTERNATIONAL FINANCE

• INVESTMENT BANKING & the financial sector
• CORPORATE FINANCE & INVESTMENTS

INVESTMENT BANKING

• FUNDAMENTALS
• RISK MGMT
• BUSINESS & DEALS

REGULATION

MANAGERIAL CHARACTERISTICS

FUNDAMENTALS

LEGAL FRAMEWORK

REGULATION of which country?

(These represent the legal frameworks that other countries are going to implement)

EUROPEAN UNION (Pan European - official group around 25 countries)

• INSPIRED BY CIVIC CODE
• USA + UK (common law)

Countries outside these groups are adopting one of such legal frameworks (China, India...)

EUROPEAN UNION REGULATION

Rationale: compliance with 2 DIRECTIVES

• BANKING DIRECTIVE (1988 - 1990) to be implemented in 90 - 92
• FINANCIAL SERVICES DIRECTIVE (developed in 1996, implemented July 1^st 1998)

BANKING DIRECTIVE: contents

1. definition of banking
2. definition of bank
3. other intermediaries
4. Supervisors (linkage with political system)

1st Definition of Banking

Joint exercise of collecting money from the market (through deposits) and giving money through loans

• CREDIT
• LOANS
• DEPOSITS
• SAVINGS
• CAPITAL MARKET

INTERNATIONAL FINANCE

• INVESTMENT BANKING & the financial sector
• CORPORATE FINANCE & INVESTMENTS

INVESTMENT BANKING

• FUNDAMENTALS
• RISK MANAGEMENT
• BUSINESS DEALS

REGULATION MANAGERIAL CHARACTERISTICS

FUNDAMENTALS LEGAL FRAMEWORK

REGULATION of which country?

(These represent the legal frameworks that other countries are going to implement.)

EUROPEAN UNION (larger than official group around 34 countries)

• Inspired by civil code

USA + UK (common law)

Countries outside these groups are adopting one of such legal frameworks (China, India...)

EUROPEAN UNION REGULATION

Rationale: compliance with 2 DIRECTIVES

BANKING DIRECTIVE (1988-1990) to supplement in 90-92

FINANCIAL SERVICES DIRECTIVE (developed in 1996, improved July 1^st 1998)

BANKING DIRECTIVE: contents

1. definition of banking
2. definition of bank
3. other interim measures
4. Supervisors (linkage with political system)

1^st Definition of Banking

Joint exercise of collecting money from the market (through deposits) and giving money through loans

CREDIT LOANS DEPOSITS SAVINGS CAPITAL MARKET

Banking is crucial to the economy because

• INVOLVES WEALTH (SAVINGS)
• FUELS the ECONOMIC SYSTEM (moves money through time and space)
• CREATES MONEY (credit)

POLITICAL CONTROL

Law defines the only institution that can manage banking

SPECIFIC REGULATION

NB other institutions can manage the 2 activities SEPARATELY

BANKS the only type of institution that can manage banking (but not just that)

Banks can do just banking? The answer depends on the ideological viewpoint of the social importance of banking

UNIVERSAL vs SPECIALIZED BANKS

UNIVERSAL BANK

Banking & other financial services

• PROS
• Better customer satisfaction
• Exploit SYNERGIES
• CONS
• Conflict of interest
• PROS
• Safer, no conflict of interest
• CONS
• Loses synergies

EUROPE

• 1936 UNIVERSAL SPECIALIZED
• 1992 UNIVERSAL

USA

• 1933 UNIV SPECIALIZED
• 1999 UNIV

CONFLICT

• of interest
• HIGHER RISK POTENTIAL lack of control

ACTIVITIES THAT CANNOT BE MANAGED BY BANKS (CANNOT BE PRODUCED)

• * INSURANCE double risk for depositors
• * ASSET MGMT manage individual wealth in pool > too risky for depositors
• * NON FINANCIAL ACTIVITIES manufacturing trade...

NB such activities cannot be included in the balance sheet. A bank can be a shareholder of firms performing these activities:

• 100%: equity & asset mgmt
• Limited percentage in insurance and commercial activities

political/social/strategic division

EUROPEAN UNION REGULATION

• banks' responsibility is not limited to the directive but to the civil code of the country

European directives shape and are embedded in each country's law

3

• other financial intermediaries can offer financial services BUT BANKING
  • these are grouped according to the level of supervision

  FINITE LIST

  • 106 notify supervisor: small firms
  • 107 supervise