AG912 Tutorial 2 - Retail, wholesale and investment banking PDF

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Retail, wholesale and investment banking...

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AG912 International Financial Markets and Banking Tutorial 2 – Retail, wholesale and investment banking Compare and contrast the functions of retail banks and building societies. Compare Both retail banks and building societies focus on consumer banking services by taking deposits and making loans. These services include mortgages, savings account and current account. Their profits come from the difference between what they pay in interest to lenders and what they charge borrowers for borrowing money. Their customers are predominantly individuals and small businesses.

Neither retail banks nor building societies engage in wholesale banking or investment banking. Contrast In contrast to retail banks, building societies do not have shareholders. They are a mutual society/institution and are therefore owned by the members. To become a member, you need to have a current/savings account with them or have a loan/mortgage. Members make the decisions on what to do. Each member gets one vote. Thus, the members have a greater say in how their money should be handled which can be seen as advantageous as the building society works toward benefitting their members. One result of this is that building societies often have better interest rates for mortgages, which is beneficial for customers. Whenever the BS makes a profit, it goes to creating better interest rates for borrowers and lenders.

Banks are PLCs. Thus, you have as many votes as you have shares.

Building societies can only borrow up to 50% from other banks. There is no such limit to retail banks. BS are required to dedicate 75 percent of their total operations toward residential mortgage loans and associated home loan products. There is no such limit for retail banks. They can do what they want which makes them more diversified.

BS can merge with other BS.

Even though building societies provide many financial services, their main concept is mortgages. It was only recently that it was possible to open a current account with building societies. Retail banks usually operate internationally as well as domestically. In contrast, building societies only operate domestically.

Are there any non-bank financial institutions in your country that offer a current account to members of the public? If so, what are they called and what are the main characteristics that distinguish them from banks? Not that I know of. What is an investment bank? What do they do? (Include some recent examples of activity by investment banks, e.g. from the FT, in your notes for future reference.) An investment bank deals with advisory financial services for their clients. In other words, they have no bank accounts and do not take deposits and do not give out loans. Though, they can help you get a loan elsewhere. Some of their services include managing equity and debt issues for companies, advising on corporate transactions such as M&A, asset management, corporate restructuring, selling part of a company, help governments raise funds, wealth management (for individuals with high net worth), assistance in risk management through hedging, derivatives, options etc. They can act as brokers, i.e. help others buy and sell securities and get commission in return.

Investment banks’ clients pay fees (IBs profit) in return for the bank’s expert advice. The investment banks can also make money through proprietary trading, which means they use their own money to invest for their own gain. Dodd-Frank Act: There is no limit to proprietary trading.

In the UK investment banks are usually part of universal bank.

“HSBC rocked by claim of investment bank’s failure” Financial Times https://www.ft.com/content/17f129b4-bcd1-11e8-8274-55b72926558f 29 September 2018 

“The division’s leadership has, year-on-year, utterly failed to create a successful strategy. We are entirely fed up and demoralised and have no confidence at all in the existing leadership.”

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“Unlike any other bank, there is no proper and effective route to provide upward feedback: hence this memo, which is whistleblowing on incompetence,”

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Furthermore, faith in HSBC’s investment banking has plummeted after many in senior positions leaving the company.

Should a bank be allowed to be both a retail and an investment bank? Give real world examples to bathem up. Explain and give reasons why. Usually, banks that are both retail and investment banks are universal banks. Universal banks are financial service conglomerate that combine retail, wholesale and investment banking services. The danger of universal banks with both investment banking and retail banking is the risk it poses on customers in the retail sector, i.e. the public. Investment banking usually entails a great amount of risk, often originating from proprietary trading. In addition to this, there are other risks which can have a great impact on high-street banking. One example is Northern Rock where there was no match between deposits and loans. When big banks deal with high risk activities, there is the possibility of bank failure. When these banks then collapse, it is the tax payers that ultimately pay for it.

When the bank gets into trouble you want the ordinary people to still be able to use their bank accounts, receive their salaries and so on. With banks that are both retail banks and investment banks, there is the danger of the investment banking sector using ordinary lenders money to do riskier activities. Due to this, a bank should not be allowed to be both a retail and an investment bank.

Another aspect of this is transparency. As a lender, you would not want your money to be used for risky activities that you have no gain from. By separating the retail bank from the investment bank, the ordinary people will not have to worry about this.

An alternative to completely separating retail banks from investment banks is ring fencing, which has been introduced in the UK. That is a good compromise for the universal banks that do not need to separate their banking sectors completely. Advantages of universal banks: Diversification of the banking activities, which makes them safer Economies of scale: How are you going to cater to big companies without big banks?

Examples In the US it was illegal 1993-1999 to be both retail and investment bank.

Goldman Sachs just opened a retail bank online....