The Positive Effect of Investment Banks

During most of the 1990s, the investment banking business has enjoyed tremendous prosperity which came from the longest bull market in history. As the stock prices have grown much faster and longer than ever, the financial services industry has grown as well. However, from year 2001 passing by the financial crisis in 2008, the global economic environment experienced a bear period. Investment banks have been under greater pressure by global economic events. Some biggest banks suffered losses in their proprietary trading accounts. M&A activity slowed, and many new security issues were postponed. If we believe that investment banking industry was quite success in the past, a question emerges with the fast changing market situation: ‘Do investment banks work?’ To answer this question, we will consider the point from the perspectives of four main stakeholders:
-Shareholders in investment banks
-Employees
-Customers
-The global economy

Shareholders in Investment Banks
Do investment banks create shareholder value? Although the return on equity suffered a dramatic decrease during the past years, the investment banking industry still enjoys a much higher ROE level (20% for each of the top 13 investment banks in terms of 2010 revenues) than most of other types of business.

Employees
Employee is another important stakeholder of the investment banking industry. Do investment banks provide satisfactory career to their employees? During the past years, the job market in investment banking industry displayed the following aspects: More lay-offs and job cuts, increased workloads, decreased incomes, and reduced recruitment. It looks like employees (and possible ones like MBA graduates) suffered a lot during this period. But if we consider the global economic environment, the situation was not so bad for the employees of the investment banking industry. The global economic recession made the whole career market suffer. Also, if we consider the much higher income level of these employees, it is reasonable that they have to take higher risks compared to most other careers, for this is not a career of stability. Working in an investment bank means an employee is ready to work at anytime and she or he has to continuously enhance her/his skills and abilities as well as networks. This is a job of challenge. Therefore, employees should adapt themselves to the difficult and complex requirements of positions they take.

Customers
Do investment banks create value for their clients? This is the most often asked question. As financial market intermediates, investment banks generate three core activities when they do business:

Corporate finance:
An investment bank works as a facilitator to intermediate companies and investors. For companies that need financing, investment banks work as underwriters or book builders to help them design and realize their financing strategy through IPOs, rights issues, etc. They also help companies issue bonds or other securities to finance their business. On the other hand, investment banks provide channels of capital investment to investors who would be using their money more effectively, and earning profits by accepting certain levels of risk. Therefore, since investment banks help relocate capital to where it can be used most effectively, they create value for both companies that need capital and investors.

Investor services:
Securities trade, research and prime brokerage are some of the main services that investment banks provide to their investors. Through these services, investment banks give advice to investors (both individual and institutional ones) and help them perform complex work. Some people claim that investment banks deliberately mislead investors to buy stocks that belong to their important customers. We have to admit that this kind of things happens, but with firm regulations, such kinds of activities now face very serious punishment.

Proprietary trading:
Market making can help customers complete stock (or other securities) transactions more easily, and therefore maintain market liquidity. From this view, investment banks add value for customers. Generally speaking, although there are some cases of scandals or negligence in investment banking activities, the industry is still very well self-regulated.

The Global Economy
The character of today’s global market confer the investment banks the ability to influence and interact with the global economy.

New customer base:
The globalization of capital markets has a significant effect on the global economy. Investment banks’ customers not only include corporate organizations and companies, but also governments and central banks. There is a kind of interaction between market and government policy. Investment banks do have some influence on it.

The enhanced ability to collect market information:
Big investment banks have business relationship within different industries, and most of their customers are the leader players of these industries. Such networks give investment banks the ability to get the newest information about any business or trade. At the same time, the huge capital flow transferred through financial networks gives some signals to these big investment banks therefore they have ability to react to the change of global economy.

The ability to redistribute resources:
Investment banks can help its customers redistribute resources (for example: capital) across industries and countries. And so, investment banks help maximize each and every resource efficiency.

Conclusion
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Based upon the analysis from the perspectives of shareholders, employees, customers and the global economy, we get the conclusion that investment banks do have a positive effect on these stakeholders since:
-They create good shareholder value.
-Their employment policy and situation are fair and reasonable.
-They provide useful services to their customers.
-They facilitate the (capital) resource redistribution in an effective way, and thus have a positive effect on the global economy.