Investment Banks and Finance Companies

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1. Investment Banks and Finance Companies 2. Investment Banks and Finance Companies <ul><li>Use their expertise to meet specialized financial needs…
  • 1. Investment Banks and Finance Companies
  • 2. Investment Banks and Finance Companies <ul><li>Use their expertise to meet specialized financial needs </li></ul><ul><li>Unlike banks, they do not book most of the assets they handle </li></ul>
  • 3. Investment Banks and Finance Companies <ul><li>Investment Banks service financial markets </li></ul><ul><li>Finance Companies extend specialized credit </li></ul>
  • 4. Investment Banks <ul><li>Also known as: </li></ul><ul><li>Investment Dealers (Canada)‏ </li></ul><ul><li>Broker-Dealers (US)‏ </li></ul><ul><li>Securities Firm (US)‏ </li></ul><ul><li>Merchant Bank (UK)‏ </li></ul>
  • 5. Investment Banks: Main activities <ul><li>Retail brokerage </li></ul><ul><li>Wholesale brokerage </li></ul>
  • 6. Retail brokerage <ul><li>Discount (bare-bone) brokerage </li></ul><ul><li>Simple execution of trade requested by client </li></ul><ul><li>Competition based solely on size of commission </li></ul><ul><li>Full service brokerage </li></ul><ul><li>Provides investment advice and charges higher commissions </li></ul>
  • 7. Wholesale brokerage <ul><li>Investing </li></ul><ul><li>Managing assets for own account or for others </li></ul><ul><li>Underwriting and distribution of primary and secondary securities </li></ul><ul><li>Private placements: less stringent disclosure </li></ul><ul><li>Public offerings: IPO, SEO, bonds, etc, must be registered </li></ul><ul><li>Depending on the risk assumed by the bank, underwriting can be full or best-effort . </li></ul><ul><li>Mergers & Acquisitions advisory work </li></ul><ul><li>Deal-making </li></ul><ul><li>Market making & principal trading </li></ul><ul><li>Maintaining a continuos bid-ask spread backed by inventory - a secondary market - for an asset. The biggest investment dealers are also primary dealers for securities issued by the government. </li></ul><ul><li>Other </li></ul><ul><li>Custody, escrow , clearance and settlement services </li></ul>
  • 8. Investment Banks: Quick facts <ul><li>Earnings very volatile - they follow the economic cycle </li></ul><ul><li>Initially smaller and independent, Canadian investment banks were acquired by the big six and foreign companies </li></ul><ul><li>Very high degree of liquidity - marketable securities, cash and receivable make up over 80% of assets </li></ul>
  • 9. Regulation: Shared between provinces and federal government <ul><li>OSC most influential </li></ul><ul><li>Licenses and monitors investment dealers </li></ul><ul><li>Reviews prospectuses and filings of listed corporations </li></ul><ul><li>Investigates law violations </li></ul><ul><li>The Canadian Securities Administrators </li></ul><ul><li>Devoted to interprovincial coordination </li></ul><ul><li>Self-regulatory organizations </li></ul><ul><li>Investment Dealers Association </li></ul><ul><li>Stock exchanges </li></ul>
  • 10. Finance companies <ul><li>Nondeposit-taking institutions that provide financing for business and consumers </li></ul>
  • 11. Finance companies <ul><li>Acceptance financing </li></ul><ul><li>buying extendet payment plans at a discount </li></ul><ul><li>owned by GM, Ford, Chrysler </li></ul><ul><li>Leasing </li></ul><ul><li>Financial </li></ul><ul><li>Operating </li></ul><ul><li>Factoring </li></ul><ul><li>purchasing accounts receivable at a discount </li></ul>
  • 12. Summary <ul><li>Investment dealers underwrite, sell, trade, advise, and take custody of securities </li></ul><ul><li>Most investment dealers are bank-owned subsidiaries </li></ul><ul><li>Investment dealership business is cyclical </li></ul><ul><li>Regulation of investment banking is complex </li></ul><ul><li>Finance companies are the least regulated FI </li></ul><ul><li>Carmaker-owned firms dominate finance companies </li></ul>
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