Lecture 20 - Investment Banking

Lecture 20- - Financial Markets and Institutions Investment Banking Mishkin& Eakins 6 th ed Chap 23 pp.592-600 Overview • Definition of

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Unformatted text preview: Financial Markets and Institutions Investment Banking Mishkin & Eakins 6 th ed. Chap. 23 pp.592-600 Overview • Definition of investment banking activities • Activities: help firms to… – Issue tradable securities (bonds, stocks) – Issue non-tradable claims (syndicated loans) – Merge with or acquire other firms Investment Banks Issuing corporation Investment Bank Investors securities securities funds funds Investment banks are intermediaries that help corporations raise external funds , especially by selling securities in the financial markets. Investment banks may underwrite a security issue Most prestigious job in the financial markets- High skills- Obtain but also redistribute large and quick earnings Highly concentrated market Top ten underwriters of Global Debt and Equity issues, 2007. 10 banks underwrite nearly 2/3 of debt and equity issues. Regulation: basics • US: Glass-Steagall regulation, 1933 – Commercial and investment banking are separate businesses – Restrictions were slowly removed from the 80’s. M&A activities in the banking sector for consolidation. – Totally reformed after Gramm-Leach-Bliley Financial Services Modernization Act, 1999 • Rest of world: – “Universal bank” is widespread Why separating investment and commercial banking activities • Investment banks were separated from commercial banks for two reasons – Risk taking: excessive risk taking using depositors funds – Conflict of interest: advise customers Firm’s fund raising: 3 steps • Fund raising (bond or stock) usually involves three phases: – Step 1: Firm searches for investment bank (IB) – Step 2: Firm and IB search for buyers + paperwork – Step 3: Effective fundraising Overview of services investment banks provide to issuers • Giving Advice – When and what to offer? – At what price? • Filing Documents – SEC registration statement – Prospectus for potential buyers • Underwriting – Form a syndicate – Contact potential buyers through network of brokers Securities Public Offering • Step 1: search for an investment bank – Investment bank submitting the highest bid wins. Two types of underwriting. – The lead underwriter (book-runner) sets up a syndicate of underwriters and a group of sellers Best effort underwriting – No price is guaranteed to issuer – Funds raising is based on best effort of the “underwriter” – The “underwriter” receives a fee – Price possibly set by the issuer – Lower price because of the absence of purchasing commitment of underwriter Firm commitment underwriting...
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This note was uploaded on 10/12/2011 for the course BIEMF 30006 taught by Professor Ippolito during the Fall '10 term at Università Bocconi.

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Lecture 20- - Financial Markets and Institutions Investment Banking Mishkin& Eakins 6 th ed Chap 23 pp.592-600 Overview • Definition of

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