December 2008

What next for
investment
banking?
© ALEX WILLIAMSON
In 2008, the independent investment bank disappeared and its roles are
likely to be shared among a variety of institutions. Regulation is set to tighten
and profi ts are almost certain to fall, writes Suzanne Hsu, CFA
BY: SUZANNE HSU, CFA
EXECUTIVE SUMMARY
won’t look very diﬀ erent, but it’s hard for Caisse d’Epargne closed its proprietary
me to see that,” said Whitney. “As equity trading business after a €600
• Regulation and transparency of
traditional banks, which need to hold million loss, while others are cutting
investment banking will increase.
more capital, you get a much more internal risk limits and putting traders’
• Proprietary trading will no longer be
boring business, where returns are books under tighter scrutiny. Société
a big driver of profi ts.
a lot lower.” Générale plans to limit proprietary
• Big players from Russia and India
So, where will the changes come? trading to 30% of the bank’s corporate
will enter the market.
and investment banking balance sheet.
REGULATION In future, proprietary trading will no
At the Reuters Global Financial longer be a key profi t driver and banks
he past year has seen a Summit, held in November, Gary Parr, will concentrate on client-related trading,
T
revolutionary upheaval in the the deputy chairman of Lazard, said: with hedge funds replacing proprietary
fi nancial services industry. “Th ere will more regulation and trading desks.
Th e independent investment transparency. Th at will be one of the
bank has all but disappeared and the major events of the next year, if not of HEDGE FUND CLIENTS
future of the sector and its roles look the next two years.” Th e G20 emergency Hedge funds are among the most
certain to change and be split among fi nancial summit in Washington important customers of investment
other institutions. promised to establish new global banks. Credit Suisse estimates that
Lloyd Blankfein, the chairman and regulators, better monitoring of ratings hedge funds paid $61 billion in fees to
chief executive of Goldman Sachs, said in agencies, hedge fund regulation, more investment banks in 2007, or 21% of
November: “Becoming a bank holding transparency and an overhaul of revenue. Th e two major sources of fees
company does not stop us doing international fi nancial organisations. are sales and trading and prime
anything we have done as an investment brokerage, but hedge fund closures,
bank.” Goldman plans to continue PROPRIETARY TRADING investor withdrawals and deleveraging
advising on, lending to and investing in In the past 18 months, proprietary will cut these revenues. At the Hedge
the same deals. Th e company does not trading desks have either lost money or 2008 conference in London in October,
expect to see business mix restrictions or been hit by rogue trader scandals, which Emmanuel Roman, of GLG partners,
leverage ratio thresholds change, but in some cases have threatened the predicted that 25% to 30% of hedge
Meredith Whitney, a banking analyst at survival of the fi rm and some banks have funds would close. George Soros has
Oppenheimer, disagrees: “Th ey say they shut their proprietary trading desks. gone even further. “In my estimation
20 WINTER 2008/09
19-20 investment banking.indd 20 27/11/08 15:52:03
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