Business of investment banking Flashcards
What is the organisational structure of an IB?
1) Generic IB structure:
- Front office
- Middle office
- Back office
2) Product Groups
3) Industry Groups
Who are part of the front office?
1) Traders (market making, buying & selling for profit)
2) Sales (promoting ideas)
3) Structuring Experts (create complex high margin products, tech)
4) Strategists (advice clients for appropriate strategies)
5) Investment analysts
What do investment analysts do?
-Analyse & investigate company performance and expectations
-write reports for dissemination to clients
- assist traders and sales team in making recommendations
What are parts of the Middle office of an IB?
1) Legal and compliance: ensure dealings are ethical and legal
2) Treasury management: funding, cap structures, liquidity risk monitoring
3) Technology: optimise IT systems, create new support for greater profits
4) HR: make sure staff is happy and motivated
5) Risk management: market-and-credit risk exposure, taken on BS. Set limits to cap avialable and propensity to risk.
What are the back office operations?
A) Finance:
1) Daily P&L management
2) Management Accounts
3) Regulatory control and management
B) Settlements:
1) Final step transfer ownership of assets
2) Accurate account of holdings and exposure
3) Solve problems where errors/overruns occure
What are product groups?
-2nd part of IB structure.
-Different deals/operations with diff clients.
-corp finance (ma, corp restruct, fin. engineering)
-cap markets(eq+debt)
-leveraged finance
-money markets
- structured products
- wealth management(indis, institutions)
-credit(Corp,sovereign)
-Derivatives
What are industry groups?
cross-functional teams in 1 industry, many different types of deals.
e.g. Health care, oil&gas, tech, engineering, aerospace&defense, Real estate investment (REITs), etc..
What is the importance of networks?
- coordination across diff specialists & hierarchical levels
- info sharing
- employees:
1) included in deals
2) establish themselves
3) determine bonus
4) long-term career potential
What is the remuneration policy in IBs?
- high to attract and retain employees
- compensation for long and very stressful hours
- high proportion from bonuses
What is the bonus policy in IBs?
- may be guaranteed for years
- substantial part of total pay
- profit sharing
- strong correlation between senior management and higher bonuses
- post fc: 200% cap UK (FS ACT 2013) –> higher salaries –>’22 changed back
What are the main costs of IBs?
- salaries and bonuses (~50% rev)
- IT rising (15/20%) (fixed)
- Others (building, admin) (10/15%)
- profit margin ~20% (varies across business areas): CROSS SUBSIDISATION
What are cost-control strategies of IBs?
1) Reduce variable costs (only bonuses but difficult)
2) Outsource (lower fixed costs) (not acceptable: loss control, confidentiality)
3) Close/sell non-profitable business areas (not-easy: entry point, one-stop-shop)
4) Redundancies (only way)
- Oct 2008: 50k employees overnight NYC
Why is cost-control necessary for IBs?
Senstive to economic/business cycles.
Boom: high revenue
Downturn: costs reduced by less than revenue(fixed)
What are famous examples of unsuccessful mergers between IBs?
1) UBS & SBC (culture & legacy issues UBS)
2) Credit-suisse & First Boston (fines and departures)
3) Nomura and Lehman brothers (culture & dysfunctional behaviour)
4) Barclays and lehman (US)
Why are IB mergers often unsuccessful?
1) Clients discontinue relationships
2) Limited economies of scale
3) Profitable functions overlap
4) No increase in market share
5) best employees leave (procedures they dont like)
