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Capital Market & Investment Banking: Future Prospect

Investment banking & capital markets go along hand in hand. Each plays a role in the advisory & capital raising function of investment banking. Capital markets generally consist of equity capital markets, debt capital markets, & leveraged finance. These bankers focus on their respective products & know the markets for these products inside & out. Capital markets are markets for buying & selling equity & debt instruments. Capital markets channel savings & investment between suppliers of capital such as retail investors & institutional investors^[1] & users of capital like businesses, government & individuals. Capital markets are important to the operation of an economy since capital is a critical component for generating economic output. Capital markets include primary markets, where new stock & bond issues are sold to investors, & secondary markets, which trade existing securities.

However, investment banking is a special section of banking operation that assists individuals or organizations to raise capital & provide financial consultancy services to them. They act as intermediaries between security issuers & investors & help new firms to go public. They either one purchase all the available shares at a price estimated by their experts & resell them to the public or sell shares on behalf of the issuer & take a commission on each share.

The industry’s restructuring has failed to help it fully recover from the global financial crisis, but new operating models can bring about transformational success. However, the capital markets and investment banking industry are below pressure amongst weak profits, high costs, & lingering strategic uncertainty. The inescapable reality is that the industry’s restructuring efforts to date have failed to produce a sustainable performance. The added crucial alteration is essential, based on the realization that for most banks, the traditional model of global capital markets & investment banking is no longer an option.

New technologies remain underutilized, & many banks are struggling to make fundamental changes in their operating models & embrace the potential benefits of digitization. Moreover, capital markets & investment banking clients are challenging the value added by banks today, with many reporting that they feel over-served by sales in an electronic/flow products world, & that banks are struggling to provide critical liquidity in products when it really matters. Numerous banks will require undergoing transformative change to transition to a successful operating model, scaling back their aspirations for their capital markets & investment banking (CMIB) businesses, & reducing their product set, client mix, & regional footprint, accompanied by a commensurate change in their cost structure. Rigid decisions requisite be made, particularly with regard to costs & banks commitment to the capital markets & investment banking business. Amid increased price competition, banks must differentiate themselves based on value propositions that meet segmented client needs. Part of the solution is to make better use of data & analytics, along with financial technology & electronic execution & distribution.

Are banks stable? Have one got the right regulatory structure? These are fundamental questions that need to be addressed if investment banks are to become strong & safe enough to weather for the next 20 years. The burden is on such industry to demonstrate that when structured & run properly, with appropriate regulation, banks can be socially essential not just socially useful.

As a career investment banker & one whose clients have historically been predominantly banks, one feels it is important to put forward the other side. Thus, it’s required to determine that investment banks in specific & banks more usually can be socially as well as economically vital.

Trying to regulate for these events is remarkably difficult. It is hard to predict when they will happen or what the consequences might be. A meaningful & synchronized global economic recovery, an improvement in internal market liquidity & normalization of global interest rates may provide a solution, but no one knows & to date, it appears very difficult to achieve.

These problems demonstrate that the financial instabilities we face are increasingly disconnected from the banking sector & investment banks.

In the future, one needs to get away from solely arguing whether the current levels of bank capital requirements & supervision are sufficient. It risks missing the point. Rather than solely relying on further tightening & ever more stringent generalized regulation, the focus needs to increasingly shift towards establishing strong leadership & developing the right culture & structure for each individual investment bank. This necessitates reviewing the DNA & model of these institutions, how they are run & understanding the role they can play in society, how they can be both socially & economically useful.

Investment banking from commercial banking, the traditional role of investment banks was to be financial intermediaries providing financial advice, capital & liquidity to corporates, financial institutions, investors & governments, spurring economic activity which helps foster corporate efficiency, economic development, jobs creation & smooth functioning of the financial services sector. Since then, investment banks were forced by regulators, shareholders & public pressure to change their structure.

Restructuring is becoming an event more obvious & necessary for investment banks. The change from universal banking to more specialist offerings is becoming more prevalent. Over the longer term, banks will need to focus on what they are good at, &, in our increasingly competitive market where the fight for market share is ever more intense, compete only in those areas where they can lead. By finding a structure that limits the need for capital, it is far simpler for regulators to understand, for shareholders to understand, & even for bankers internally to understand. It also helps to create a culture defined by integrity, quality, ownership & determination.