Investment Banking Activities Research Articles

Commerce Bancorp, Inc. (NJ)

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC: 522110)Commerce Bancorp, with assets of $30.50 billion and deposits of $27.66 billion as of Dec 31 2004, is a bank holding company primarily serving the Metropolitan Philadelphia, New Jersey, Delaware and New York markets. Co. operates four bank subsidiaries: Commerce Bank, Commerce Bank/Pennsylvania, Commerce Bank/Delaware, and Commerce Bank/North. As of Dec 31 2004, these banks provided a full range of retail and commercial banking services through 319 retail branch offices. Lending services are focused on commercial real estate and commercial and consumer loans to local borrowers. Co. also has securities, investment banking and brokerage activities, and an insurance brokerage agency.

Umbrella Supervision and the Role of the Central Bank

Deregulation and financial consolidation have led to the development of financial holding companies - allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella - and the Federal Reserve has been named supervisor of the consolidated enterprise. This Policy Discussion Paper will show that there likely are economies of scope between the Fed's inherent central-banking responsibilities and those of an umbrella supervisor and that these duel roles benefit both the Fed and functional regulators.

Risk-Adjusted Performance Measures at Bank Holding Companies with Section 20 Subsidiaries

This paper examines risk-adjusted performance measures in banking, which are used as a guide for efficient asset allocation, performance evaluation, and capital structure decisions in complex, multidivisional financial institutions. Traditional measures of performance are contrasted with the portfolio-based risk-adjusted measures using a unique detailed micro data set for a sample of domestic bank holding companies (BHCs) that engaged in both commercial banking and investment banking activities between 1990 and 1999. This paper finds evidence that traditional stand-alone performance measures can lead to results substantially different from those of the portfolio models. This study also examines BHCs? optimal portfolios consisting of traditional and nontraditional banking activities derived from the efficient frontiers. These results show that there are gains from diversification as indicated by the composition of optimal portfolios.

Commerce Bancorp, Inc. (NJ)

AbstractCommercial Banking (MIC: 8.1 SIC: 6021 NAIC: 522110)Commerce Bancorp, with assets of $30.50 billion and deposits of $27.66 billion as of Dec 31 2004, is a bank holding company primarily serving the Metropolitan Philadelphia, New Jersey, Delaware and New York markets. Co. operates four bank subsidiaries: Commerce Bank, Commerce Bank/Pennsylvania, Commerce Bank/Delaware, and Commerce Bank/North. As of Dec 31 2004, these banks provided a full range of retail and commercial banking services through 319 retail branch offices. Lending services are focused on commercial real estate and commercial and consumer loans to local borrowers. Co. also has securities, investment banking and brokerage activities, and an insurance brokerage agency.

Commerce Bancorp, Inc. (NJ)

AbstractCommercial Banking (MIC: 8.1 SIC: 021 NAIC: 22110)Commerce Bancorp, with assets of $30.50 billion and deposits of $27.66 billion as of Dec 31 2004, is a bank holding company primarily serving the Metropolitan Philadelphia, New Jersey, Delaware and New York markets. Co. operates four bank subsidiaries: Commerce Bank, Commerce Bank/Pennsylvania, Commerce Bank/Delaware, and Commerce Bank/North. As of Dec 31 2004, these banks provided a full range of retail and commercial banking services through 319 retail branch offices. Lending services are focused on commercial real estate and commercial and consumer loans to local borrowers. Co. also has securities, investment banking and brokerage activities, and an insurance brokerage agency.

Issues of Tax Stimulation of Investment Activity of Banks

The article is devoted to the questions of development of tax strategy of the state in the field of stimulation of investment activity of banks. The author analyzes the influence of taxation on the yield of credit transactions of banks. Special attention is paid to tax risks of banks in realization of investment operations. Issues of tax stimulation of investment demand and investment supply are considered.

Investment Opportunity Set, Product Mix, and the Relationship between Bank CEO Compensation and Risk-Taking

The product mix changes that have occurred in banking organizations during the 1990s provide a natural experiment for investigating how firms adjust their executive compensation contracts as their mix of businesses changes. Deregulation and new technology have eroded banking organizations' comparative advantages and have made it easier for nonbank competitors to enter banking organizations' lending and deposit-taking businesses. In response, banking organizations have shifted their sale mix toward noninterest income by engaging in municipal revenue bond underwriting, commercial paper underwriting, discount brokering, managing and advising open- and close-ended mutual funds, underwriting mortgage-backed securities, selling and underwriting various forms of insurance products, selling annuities, and other investment banking activities via Section 20 subsidiaries. These mix changes could affect firms' risk and the structure of CEO compensation. The authors find that as the average banking organization tilts its product mix toward fee-based activities and away from traditional activities, equity-based compensation increases. They also find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, the authors observe that equity-based compensation is more important after the Riegle-Neal Act of 1994.

The Financial Modernization Act: Evolution or Revolution?

The Gramm-Leach-Bliley Act (GLBA) removed the barriers that separated commercial banking from investment banking, merchant banking, and insurance activities. Did this legislation revolutionize the financial services industry by allowing Financial Holding Companies (FHCs) to exploit revenue efficiencies and cost economies, or did it merely formalize an evolutionary process of deregulation that was already well underway? Our evidence refutes the notion that the GLBA was a revolutionary event, at least in the short run. Using a combination of market and accounting data, we find that, to date, FHC status has had little effect on bank performance. We do find, however, limited evidence that FHCs that were Section 20 affiliates before passage of the GLBA were able to further exploit the synergies between investment banking and commercial banking.

Accounting for financial instruments in the banking industry: conclusions from a simulation model

The paper analyses the effects of three sets of accounting rules for financial instruments – Old IAS before IAS 39 became effective, Current IAS or US GAAP, and the Full Fair Value (FFV) model proposed by the Joint Working Group (JWG) – on the financial statements of banks. We develop a simulation model that captures the essential characteristics of a modern universal bank with investment banking and commercial banking activities. We run simulations for different strategies (fully hedged, partially hedged) using historical data from periods with rising and falling interest rates. We show that under Old IAS a fully hedged bank can portray its zero economic earnings in its financial statements. As Old IAS offer much discretion, this bank may also present income that is either positive or negative. We further show that because of the restrictive hedge accounting rules, banks cannot adequately portray their best-practice risk management activities under Current IAS or US GAAP. We demonstrate that – contrary to assertions from the banking industry – mandatory FFV accounting adequately reflects the economics of banking activities. Our detailed analysis identifies, in addition, several critical issues of the accounting models that have not been covered in previous literature.

Who Benefits from Deregulating the Separation of Banking Activities? Differential Effects on Commercial Bank, Investment Bank, and Thrift Stock Returns

AbstractWe analyze the deregulation impact on commercial banks, investment banks, and thrifts associated with four major events progressively integrating commercial and investment banking activities in the United States during the 1990s. We find that commercial banks are the only group to react favorably to Federal Reserve announcements relaxing firewalls and easing restrictions on commercial bank revenues from investment banking activities. These regulations primarily benefit large banks. The Bankers Trust acquisition announcement of investment bank Alex Brown is associated with increased wealth for each of the three types of financial service institutions. At the eventual deregulation of the financial services industry, with the passage of the Financial Services Modernization Act in 1999, the values of commercial banks and investment banks increase significantly although thrifts are not affected.

Financial Instruments Fair Value Accounting for (not against) the Banking Industry

The paper analyses the effects of three sets of accounting rules for financial instruments – Old IAS before IAS 39 became effective, Current IAS or US GAAP, and the Full Fair Value (FFV) model proposed by the Joint Working Group (JWG) – on the financial statements of banks. We develop a simulation model that captures the essential characteristics of a modern universal bank with investment banking and commercial banking activities. We run simulations for different strategies (fully hedged, partially hedged) using historical data from periods with rising and falling interest rates. We show that under Old IAS a fully hedged bank can portray its zero economic earnings in its financial statements. As Old IAS offer much discretion, this bank may also present income that is either positive or negative. We further show that because of the restrictive hedge accounting rules, banks cannot adequately portray their best practice risk management activities under Current IAS or US GAAP. We demonstrate that – contrary to assertions from the banking industry – mandatory FFV accounting adequately reflects the economics of banking activities. Our detailed analysis identifies, in addition, several critical issues of the accounting models that have not been covered in previous literature.

L’impact de Bâle II sur les PME françaises

The impact of Basel II on the strategy of bank The impact of Basel II on the strategy of banks must be seen as a sequel to Basel I : by setting a uniform minimum price for bank credit, in terms of the equity required to support it, Basel I has created a price umbrella which allowed massive disintermediation of finance during the 90s. Regulatory arbitrage has led the banks to transfer part of their risks to insurers and hedge funds. With Basel II, the pricing of bank credit will be closer to market references. This, plus the unfavorable market valuation of investment banking activities, may induce a return to balance sheet financing by the banks. Basel II will also create new arbitrage opportunities for the banks in managing their risk portfolio, and a strong incentive to strengthen their internal risk evaluation functions. JEL classifications : D4, G21, G28

Understanding America's hesitant steps toward financial capitalism: Politics, the Depression, and the separation of commercial and investment banking *

Few would disagree that the Glass-Steagall Act of 1933 is thecontinental divide in American financial and banking history. Bydisallowing banks from getting involved in the investment bankingindustry, this Act imposed an institutional change that shaped howfinancial institutions conduct their business, even today in itsdecline. Conventional wisdom has it that the Act was enacted tocorrect the ``deficient'' financial system that existed during theperiod. In this paper we investigate whether this assertion can beempirically verified by analyzing the Senate vote on a predecessorof this Act (which included the clause separating commercialbanking from investment banking activities). Using multinomiallogits, we examine what may have motivated senators to vote for itspassage. The econometric evidence indicates that the Senate votewas significantly influenced by important interest groups(including national banks as well as manufacturing sectorinterests), despite the large populist outcry for financial marketreforms at the onset of the Depression.

The location of investment banking business

Since 1998, there have been more foreign banks in France than French ones. Many of these banks are wholesale banks or investment banks. This article reviews the factors that lead banks to locate their investment banking activities in a particular market. The author mentions three factors. First, history, and this holds true for the role within Europe of London where the first bond and equity issues of any significance took place. The second factor is the location of clients, be they issuers or investors. In the author’s view, however, trading activities can be located anywhere. The third factor is the growth strategy model of investment banks. This model, called a « tubular strategy », is characterized by development in a particular business segment followed by an offshoot in another segment in synergy with the first one. This growth model leads banks to operate close to specific client bases. The author illustrates his point with the example of HSBC, the second largest bank in the world. This model also explains the strong presence of US banks in Europe and finally the location of non-French banks in France. In conclusion, the impact of new technologies on the location of investment banks is mentioned. JEL Classification : G24, R38

WHO NEEDS GLASS‐STEAGALL? EVIDENCE FROM ISRAEL'S BANK SHARES CRISIS AND THE GREAT DEPRESSION

This paper compares bank share manipulation in Israel with that in the United States prior to the passage of the Glass‐Steagall Act and uses the comparison to assess the desirability of restricting the investment banking activities of commercial banks—not only in the United States and in Israel, but also in the economies in transition (EITs) of Eastern Europe. Many of the techniques of and motivations for manipulation were similar. However, because of their larger relative size, banks in Israel, were far more successful in eliminating market risk. The paper concludes that Glass‐Steagall restrictions could prove a useful policy prescription in Israel, the EITs, and elsewhere in the developing world.

Les déterminants stratégiques et les changements dans les activités de banque d'affaires à l'échelle mondiale

Strategic drivers and shifts in global investment banking This article deals with the exposed ambition of banking institutions over the last ten years to develop global investment banking activities. The industry experienced however concentration and over capacity, leading to the decrease of commissions and many restructurations allowed, among other points, by the blurring of distinctions between commercial banks, investment banks and securities houses. Growing competition in EMU reveals different strategies from European banks, that is to say resolving over capacity problems, absorbing new opportunities, establishing oligopoly returns, establishing long term relationships with clients and adapting to growth uncertainty in industry. Concluding section deals with the effects of EMU on banking sector, and the losers and the winners inside this sector.

The underwriting experience of commercial bank affiliates prior to the Glass-Steagall Act: A reexamination of evidence for passage of the act

We examine a major rationale for the passage of the Glass-Steagall Act separating commercial and investment banking activities in the U.S: that these banks abused their superior knowledge by misrepresenting the quality of inferior security issues or passing off bad commercial loans through publicly offered security issues. This issue is of current interest, even in today's more relaxed environment in the U.S. and in the universal banking system in Europe, since there are still lingering doubts that such abuses will not recur. In a systematic study of the performance of bond issues underwritten by different classes of underwriters prior to the passage of the Glass-Steagall Act, we find bank affiliate issue default rates were lower, ex ante yields were lower, ex post prices were higher, and the relative ability of ex ante yields to predict ex post performance no different than investment bank issues. The results hold for all categories of bond issues: domestic corporate, foreign corporate, and foreign governments. We have also isolated the performance of the bonds underwrit National City Company and Chase Securities Corporation, which were targets of the Pecora hearing. These two bank affiliates were found to issue bonds of lesser quality than the other bank affiliates, but no worse than those of the investment banks.

The Changing Borders of Banking: Trends and Implications

The paper outlines the evolution of the financial industry across industrialised countries since liberalisation gathered momentum in the 1980s and assesses its implications for prudential regulation and supervision, paying particular attention to changes in the degree of compartmentalisation between (commercial and investment) banking, insurance and non-financial business activities. Two key conclusions are highlighted. First, as segmentation has weakened, the compartmentalisation of prudential regulation and supervision has come under pressure. At the same time, how far harmonisation in prudential arrangements can, or indeed, should, be extended remains a moot question. Second, the changes have also put a premium on the need to find an appropriate balance between official and market discipline. The scope for improvement in this area should not be underestimated. It is argued that information disclosure should be strengthened and capital standards upgraded.

Informational externalities of seasoned equity issues

Abstract We examine share-price reactions of commercial bank common stock issues and find negative effects on rival commercial and investment banking firms. In comparison, we find no such intra-industry effects for equity issues by industrial firms. Our results support theoretical models in which bank loan portfolios impound asymmetric information about client firms, so that adverse individual bank announcements generate external information effects on other banks. A policy implication of these results is that regulatory pressures applied to individual banks induce spillover costs for the commercial and investment banking industries. Our evidence also indicates that the legal separation of commercial and investment banking activities is artificial.

Before the Glass-Steagall Act: An analysis of the investment banking activities of national banks

Why do some banks fail in financial crises while others survive? This article answers this question by analysing the effect of the Dutch financial crisis of the 1920s on 142 banks, of which 33 failed. We find that choices of balance sheet composition and product market strategy made in the lead-up to the crisis had a significant impact on banks' subsequent chances of experiencing distress. We document that high-risk banks – those operating highly-leveraged portfolios and attracting large quantities of deposits – were more likely to fail. Branching and international activities also increased banks' default probabilities. We measure the effects of board interlocks, which have been characterized in the extant literature as contributing to the Dutch crisis. We find that boards mattered: failing banks had smaller boards, shared directors with smaller and very profitable banks and had a lower concentration of interlocking directorates in non-financial firms.