What are the functions of an Investment bank ?1. They purchase new securities from corporate issuers and resell them to the public. For example bonds, Mortgage and Asset backed securities.

2. They trade securities on Capital Markets.

3. They advise on and arrange M and A deals.

National Banking Association

• Association that requires commercial banks to be a member of the Federal Reserve System.

• The Federal Reserve or “The Fed” is referred to as the National Credit Authority in the US.

• Broker acts as an intermediary, an agent that represents buyers and sellers.

• Dealer acts as Principal to his or her own account. They take on risk through positions.

Universal Bank

A Universal bank participates in many kinds of banking activities and is both a commercial bank and an investment bank.

Banking that involves not only services related to loans and savings but also those involved in making investment in companies.

Credit Suisse- Structure typical of Universal Banks

• Organized into three divisions:• 1. I B • 2. P B • 3. A M

• This bank was formerly known as CSFB. However “the First Boston part of the name was phased out in 2006”

Famous banking mergers

• Who did the Union Bank of Switzerland merge with in 1997 as referred to in the text ?

• What is it known as today ?

• Trading name ?

Can you think of any other examples where

names or technology have been phased out?

Examples

• How about Sony – one of their famous product brands was phased out or discontinued earlier this year.

• What was it ?___________________

• A kind of TV Network was phased out recently ?

• What was this network or system replaced by ?

Pg. 84 The Gramm- Leach Bliley Act • Legislation =law • The GLB and GS acts were important pieces of law

in the securities industry. • In a nutshell:• The repeal or removal of parts of the GS act of

1933 by the GLB act of 1999 removed the separation between Investment Banking activity (Securities business) and Commercial Banks which accepted deposits

Deregulation of the banking industry

• After the change made by the GS Act Investment Bank and Commercial Bank activity was merged and operated under “one roof.”

• The deregulation also removed conflict of interest prohibitions (restrictions) between IB (securities) and Commercial activity (Personal Lending and deposit taking)

Deregulation

• Which of course resulted in Moral Hazard which we will cover soon.

• (i.e. Wall Street IB firms would speculate (bet) with their depositors money.)

• Money that was held in commercial banks owned or created by the Investment Banks.– (remember the video outlining the sub-prime

lending problem and the resulting GFC)

Pg. 94 Moral Hazard

• Economists explain Moral Hazard as a special case of Information Asymmetry.

• Information Asymmetry is a situation where one party has more information than another.