US Investment Banks Research Articles

European Super League: designing “new” football

Purpose The purpose of this study is to use design thinking principles to understand the failure of the ‘new’ European Super League, and also understand how it could be redesigned. Research methodology This case has been developed from secondary sources, including news reports, social media sites, annual reports and websites of the Union of European Football Associations and the European football clubs. This case was classroom-tested with post-graduate management students in a design thinking course in May 2021 at an Indian business school, S.P. Jain Institute of Management & Research, in Mumbai, India. Case overview/synopsis In April 2021, a new football league – the European Super League, is announced as a breakaway rebel league, in direct competition with United European Footballers Association's Champions League. It is backed by the top 12 European clubs and officials in European football, besides the US investment bank, JP Morgan. The new league is touted as one intended to save football. It is, however, denounced by fans and shunned almost universally. The league, which has been planned for the past three and half years, faces collapse. Why did the European Super League fail? How could the founders design a new league? Complexity academic level This case could be used in an undergraduate or MBA classroom or an executive education programme in a design thinking course. It can also be used to teach marketing courses such as marketing strategy, new product development and consumer behaviour.

The emergence and development of the cryptocurrency as a sign of global financial markets financialisation

The article presents one of the most important, in the author's opinion, manifestations of further intensification of the processes of financialisation of global financial markets, which was the emergence of decentralized digital currencies (so-called cryptocurrencies) based on blockchain technology. Their creation and existence on the global financial market have been widely considered as one of significant effect of the global financial crisis, which symbolic beginning is September 15, 2008, when one of the largest US investment banks Lehman Brothers collapsed. The worldwide COVID-19 pandemic has only highlighted the importance of this effect of financialization. The purpose of the article is to present the impact of cryptocurrencies, including bitcoin, on the deepening of the processes of financialisation of modern financial markets. Author analysis is based on statistical data, on the literature review and documents of world financial institutions.

The demise of the US investment banking from a Minskian perspective

This research analyses the causes behind the de-facto demise of the US firms dedicating their activity exclusively to securities business, in the wake of the financial crisis of 2008, focusing on the firms´ risk mismanagement and bad lending practices, that increased fragility and risk exposures in the US securities sector. These practices emerged when leading firms became gradually convinced of the goodness of financial instruments of their own design, as they engaged in proprietary trading activities and trading of financial products with residual liquidity, increasingly shifting their use from hedge to speculative purposes. In this way, leading financial operators able to take unrestricted risk and highly leveraged positions in unregulated markets are the cause behind volatility in asset prices, and they are ultimately responsible of the cyclical boom and bust dynamics of the market-based economy

GLOBALIZATIONAL AND NORMATIVE DETERMINANTS OF THE IMPROVEMENT OF THE BANKING CREDIT RISK MANAGEMENT IN POLAND

Since the beginning of the nineties, globalization processes have also been progressing faster in Poland. One of the sectors of the Polish economy in which globalization is proceeding relatively quickly is the financial sector, especially commercial banking. This is related to the acquisition of Polish banks by foreign financial institutions, i.e. the process that most intensively occurred in the 90s of the last century. In addition, Poland's accession in 2004 to the structures of the European Union and the development of electronic banking, the development of technologies and Internet services are factors that have accelerated globalization processes in Poland in recent years. The high level of globalization also applies to the capital market, both from the side of the organization and the nature of transactions made at the Warsaw Stock Exchange. The result of this high level of globalization of financial markets in Poland was the rapid appearance of negative market and cyclical effects of the global financial crisis in the autumn of 2008. The source of this crisis was the acceptance of an excessively high level of credit risk in US investment banks. However, the negative economic consequences of this crisis also quickly appeared in Poland. In addition to the significant depreciation of market valuations of shares of companies listed on the War-saw Stock Exchange, significant macroeconomic effects have also appeared in the form of a decline in the economic growth of the Polish economy. The existing situation indicates the need to continue the improvement of banking prudential regulations and credit risk management instruments in financial institutions.

Resilience of the US securities industry to the global financial crisis

The global financial crisis was underpinned by the securitization of subprime mortgages led by US investment banks, and its outbreak was marked by the bankruptcy of Lehman Brothers on 15 September 2008. This paper investigates the resilience of the US securities industry to this shock and its evolution between 2008 and 2016, with focus on employment, location, remuneration, sell-side versus buy-side dynamics, and gender. Results show that the US securities industry has suffered significant losses in terms of employment and its recovery has been slow. Under the pressures of depressed demand, new regulation and cost cutting, the industry has gone through significant adaptation in terms of corporate reorganisation, value chain optimisation, market reorientation and innovation, but has not yet adapted in terms of remuneration. The buy-side of the industry has performed much better than the sell-side in terms of resistance and recovery. The patterns of resistance and recovery have been highly uneven across states and cities. While the top of the hierarchy of securities industry centres has not changed significantly in terms of ranking, large centres, with New York in the lead, have suffered larger job losses than smaller centres, reflecting a significant spatial dispersion of employment in the industry. Male employment has proven more resilient than female employment highlighting continued gender inequality and lack of diversity.

Swap Curve Steepener

The case is about a decision problem facing James on whether or not to invest in a structured product called the “CMS Steepener” issued by a large US investment bank. The payoff from the product is linked to two constant maturity swap (CMS) rates, and the investor profits if the difference between the two CMS rates increases, or alternatively if the CMS curve steepens. The case describes the risks that investing in such a product poses, and presents relevant data on the CMS rates, term structure and recent financial history of the issuer to help resolve James's decision problem.

Estimation of Tail Risk Based on Extreme Expectiles

SummaryWe use tail expectiles to estimate alternative measures to the value at risk and marginal expected shortfall, which are two instruments of risk protection of utmost importance in actuarial science and statistical finance. The concept of expectiles is a least squares analogue of quantiles. Both are M-quantiles as the minimizers of an asymmetric convex loss function, but expectiles are the only M-quantiles that are coherent risk measures. Moreover, expectiles define the only coherent risk measure that is also elicitable. The estimation of expectiles has not, however, received any attention yet from the perspective of extreme values. Two estimation methods are proposed here, either making use of quantiles or relying directly on least asymmetrically weighted squares. A main tool is first to estimate large values of expectile-based value at risk and marginal expected shortfall within the range of the data, and then to extrapolate the estimates obtained to the very far tails. We establish the limit distributions of both of the resulting intermediate and extreme estimators. We show via a detailed simulation study the good performance of the procedures and present concrete applications to medical insurance data and three large US investment banks.

Les banques européennes se retirent-elles de la scène internationale ?

Après la crise, il semblerait que les banques européennes se retirent du système bancaire international. Elles délaissent par ailleurs le marché des activités de banque d'investissement au profit des grandes banques d'investissement américaines. Mais ce constat est-il juste ? Nos résultats montrent que les banques asiatiques ne subissent pas les effets des crises tandis que les activités des grandes banques américaines ont repris après une recapitalisation rapide et décisive en mars 2009. En Europe, la situation est contrastée. Les banques britanniques et suisses ont subi d'importantes restructurations et une diminution de leurs activités internationales. Les banques de la zone euro sont dans une position intermédiaire : elles ont subi de légères restructurations tout en préservant leur présence à l'international. Les responsables politiques doivent faire un choix. Nous préconisons d'achever l'Union bancaire et de confier la surveillance prudentielle à la BCE et le mécanisme de soutien budgétaire au MES. Cela placerait la zone euro sur un pied d'égalité avec les États-Unis et la Chine qui disposent d'un mécanisme de soutien budgétaire crédible pour leur système bancaire. À la suite du Brexit, nous suggérons que l'Autorité européenne des marchés financiers assume la fonction de superviseur central des marchés pour soutenir la création de marchés de capitaux dynamiques sur lesquels les banques d'investissement américaines mais également européennes pourraient jouer un rôle. Classification JEL : F36, F38, G21, G23, G28.

The Global Investment Banks are now all Becoming American: Does that Matter for Europeans?

In the aftermath of the global financial crisis, the market share of US investment banks is rising, while that of their European counterparts is declining. We present evidence that US investment banks are on the verge of taking over pole position in European investment banking. While the US players have thus become dominant in Europe, China has taken matters into its own hands. Since 2015, Chinese investment banks have overtaken the position of American and European investment banks in the Asian-Pacific market. Credit rating agencies and investment banks are the gatekeepers of the Capital Markets Union. The supervisory agencies in Europe can effectively supervise the European operations of these US managed players. We discuss the consequences of Brexit. On the political side, we suggest that the European Commission should keep on viewing its, albeit declining, banking industry as a strategic sector. The Commission, the European Central Bank and the Bank of England should jointly develop a strategic agenda for the EU–US Regulatory Dialogue. Finally, corporates rely on investment banks to issue new securities. We recommend that the big European corporates should cherish the (few) remaining European investment banks, by giving them at least one place in a further US dominated banking syndicate. That could help to avoid complete dependence on US investment banks.

IMPROVING MANAGING THE CREDIT RISK IN CONDITIONS SLOWING ECONOMIC GROWTH

The recent financial crisis in 2008 has made a significant contribution to the growing importance of the analysis of processes of credit risk management and forced to take measures to improve the process. Sources of the financial crisis is now largely associated with the activities of mainly US investment banks that sold derivatives on the basis of income from high-risk mortgages. Increased risk recorded in the banking business, as a rule, also a derivative of the economic downturn in the sectors of bank customers, including non-financial business entities. In such a situation, banks are limited to provide customers with a more risky loan pro-active financial products. Given the global nature of financial markets and the importance of investment banking in the financial systems and the necessary actions to improve the tools for identifying, quantifying and managing banking risks, especially credit and lending institutions to protect themselves from potential sources of risk. The present analysis showed that the anti-crisis measures are mainly focused on the introduction of additional restrictions in the provision of financial products that may not be enough and may even be harmful, helping to reduce the economic growth of individual countries. Measures are also needed to strengthen supervisory agencies in the financial systems, including transnational supervision.

The Effect of Corporate Governance on the Performance of US Investment Banks

This paper focuses on the impact of the corporate governance, using a plethora of measures, on the performance of the US investment banks over the 2000–2012 period. This time period offers a unique set of information, related to the credit crunch, that we model using a dynamic panel threshold analysis to reveal new insights into the relationship between corporate governance and bank performance. Results show that the board size asserts a negative effect on performance consistent with the ‘agency cost’ hypothesis, particularly for banks with board size higher than ten members. Threshold analysis reveals that in the post‐crisis period most of investment banks opt for boards with less than ten members, aiming to decrease agency conflicts that large boards suffer from. We also find a negative association between the operational complexity and performance. Moreover, the CEO power asserts a positive effect on performance consistent with the ‘stewardship’ hypothesis. In addition, an increase in the bank ownership held by the board has a negative impact on performance for banks below a certain threshold. On the other hand, for banks with board ownership above the threshold value this effect turns positive, indicating an alignment between shareholders’ and managers’ incentives.

Learning from Performance: Banks, Collateralized Debt Obligations, and the Credit Crisis

This article investigates how firms in competitive markets use external examples to assess the value of novel practices, focusing on the substantively important case of collateralized debt obligation (CDO) underwriting among US investment and commercial banks, 1996–2007. Diffusion researchers have struggled to adjudicate between competing mechanisms of social contagion, including imitation and learning. I use event-history methods to examine how banks responded to the activities and results of other CDO underwriters. I show that banks learned superstitiously from the share price performance of other CDO underwriters; as the popularity of CDO underwriting increased, banks became even more attentive to confirmatory evidence on this dimension. These findings suggest important refinements to theories of social contagion, especially neoinstitutional theory. By focusing on ordinary organizational processes in an extraordinary context, I uncover an alternative explanation for the rise of complex securitization, with implications for current understandings of the credit crisis.

Cutting the Credit Line: Evidence from Germany

The massive decline in international trade in 2008/09 is often attributed to the global deterioration in financial conditions after the bankruptcy of a US investment bank, Lehman Brothers. This paper examines the association between external finance and firm activity in Germany in more detail. In particular, we explore a novel data set that matches a full sample of quarterly bank-firm lending data with detailed information on borrowers and lenders. Our results indicate that foreign sales are insensitive to variations in external finance. While German banks affected by the crisis have significantly reduced their credit supply, we only observe a causal (negative) effect on domestic sales. Exporting firms, in contrast, seem to be particularly good borrowers.

Lehman Brothers: Did Markets Know?

On September 15, 2008, Lehman Brothers Inc. announced their filing for bankruptcy. This announcement did take markets by surprise causing widespread panic and disruptions in financial systems worldwide. It has been widely argued that financial contagion has escalated the insolvency into a systemic crisis. This paper studies the reaction of Lehman's competitors and market participants to this bankruptcy announcement and its spill overs to other institutions. Specifically, we focus on transaction prices of major U.S. investment and commercial banks prior to and after the bankruptcy. By decomposing their equity bid-ask spreads, we find evidence that the bankruptcy contributed to increasing adverse selection risk as well as inventory holding risk. Moreover, we find supporting evidence that the degree of competition among market makers did decline. All three components did contribute to a significant rise in transaction costs. Interestingly, the relative contribution of each channel has remained roughly constant. In the case of Lehman's stocks the adverse selection component rises only in the last three days of trading prior to the bankruptcy filing announcement. Otherwise adverse selection costs are in line with the other US investment banks. Moreover, we do not find any evidence of an increase in the adverse selection component of potential bidders, from which we interpret that the market did not expect a take-over or merger. We explore the robustness of our decomposition by employing volume-synchronized probability of informed trading-measures and impact regressions on prices, quantities, and their respective innovations. In general, we find little evidence of informational contagion. Moreover, any information effects are rather short-lived. Even in periods of crisis price discovery in stock markets remains remarkably efficient.

Estimation of the Marginal Expected Shortfall: the Mean When a Related Variable is Extreme

SummaryDenote the loss return on the equity of a financial institution as X and that of the entire market as Y. For a given very small value of p > 0, the marginal expected shortfall (MES) is defined as E{X|Y>QY(1−p)}, where Q Y(1 − p) is the (1 − p)th quantile of the distribution of Y. The MES is an important factor when measuring the systemic risk of financial institutions. For a wide non-parametric class of bivariate distributions, we construct an estimator of the MES and establish the asymptotic normality of the estimator when p ↓ 0, as the sample size n → ∞. Since we are in particular interested in the case p = O(1/n), we use extreme value techniques for deriving the estimator and its asymptotic behaviour. The finite sample performance of the estimator and the relevance of the limit theorem are shown in a detailed simulation study. We also apply our method to estimate the MES of three large US investment banks.

When Complexity Impairs Disclosure A Critique of SFC's Proposal to Strengthen the Disclosure Regime after the Lehman Minibonds Incident in Hong Kong

The shockwaves from Lehman Brothers’ demise in September 2008 are still reverberating through the world of retail structured financial products in Asia. The retail buyers across the region, in particular, those in Hong Kong suffered losses from complex structured financial products linked to the failed US investment banks. The regulators in Hong Kong have proposed to tighten up the disclosure regime so as to provide sufficient information regarding the risks involved in structured securities to the end customers. This article reviews potential problems pertaining to this regulatory move.

Symposium: Australia–US Economic Relations and the Regional Balance of PowerAustralia–US Economic Relations following the 2005 Free Trade Agreement

The Australia–United States Free Trade Agreement (AUSFTA) came into force on 1 January 2005. Australia's exports to the US have since stagnated, while imports into and US investments in Australia have surged. This article analyses Australia–US economic relations with a focus on trade and investment flows. In addition, it examines the capital raising by US investment banks for these projects. The analysis traces the effects on the relationship of the Global Financial Crisis, the resources boom in Australia and the rise of the Australian dollar.澳美自由贸易协定2005年元旦起生效。自那以来，澳大利亚对美出口止步不前，而来自美国的进口和投资却一路上扬。本文考察了澳美经济关系，重点分析了贸易和投资流。此外作者还研究了美国投资银行为那些项目的融资。以往分析研究探索了全球金融危机、澳大利亚起源开发热以及澳大利亚元升值三者之间关系所受的影响。

In This Issue

In This Issue

Why Lehman Brothers Failed: 'Preventive Measures and Recommendations'

The 2008 global financial meltdown witnessed most of the top global financial institutions crumble into liquidation and bankruptcy. The incident culminated in most of these firms either liquidated or experienced plummetion in returns. The failure of Lehman Brothers in the midst of the global financial crisis was the largest catastrophe to hit the financial industry in the United States. Notably, the leading US investment bank suffered huge losses within the month of September. Lehman’s stock price plummeted by 73% of its value in the first half of September alone and by the mid of September 2008, lost $3.9 billion in their attempt to dispose of a majority of their shares in one of their subsidiaries. To contribute to the body of knowledge, this paper investigated and reviewed the activities or transactions that resulted in the failure of Lehman Brothers. The findings revealed multiplicity of factors ranging from dubious accounting practices, unethical management practices, over investment in risky unsecured investments, laxity on the part of regulators. External auditors also played a major part in this failure by not detecting these financial statement malpractices by the Lehman managers. Policy makers such as the International Financial Reporting Standards (IFRS), Security and Exchange Commission (SEC), the Basel Accord etc, ought to initiate stringent policies to address Lehman failure to avert any future occurrence. Keywords: Financial meltdown, Liquidation, Bankruptcy, IFRS, SEC, Basel Accord.

Greece Debt Crisis and Wall Street Role Behind it

In order to enter eurozone, Greece falsified its budgetary report and hide true extent of its debt. US investment bank Goldman Sachs provided help in masking debt through use of cross-currency swaps, and later the same bank pushed Greece further toward default. When true extent of Greece debt was revealed, it sparked a sovereign debt crisis that threatens very foundations of eurozone because of possible spread to other member states. It is a matter of debate whether USA actually benefits from Euro crisis, as main competitor of US dollar is weakened in the middle of ongoing US debt crisis. In any case, Euro project was created with several inherent weaknesses which were shown in its first crisis.