Investment Banks and Globalization

In the article the main though is represented by a statement that: “We cannot easily talk about alternatives to globalisation in investment banking; only of the different strategies for meeting its challenges”. According to the author, globalisation is rather mature phenomenon in the business.

Globalising capital flows and ever more sophisticated financial instruments have created extraordinary challenges and opportunities for financial intermediaries like investment banks. This also forced global firms to develop the skills and expertise required to co-ordinate and manage financial and operational risks. These risks have become ever more complex as companies respond to customer demand and extend their reach across continents.

It is beyond doubt that globalization has been a key issue in the business for a long time. It essentially increases the chances and opportunities available in investment banking: instead of focusing intensively on individual countries or regions ‘ as was previously the case ‘ the business now looks for lucrative investment opportunities throughout the world, at the same time offering services globally. But what about the risks?

Do higher risk exposure come with ever broader scope of business? In general yes, but as a result of increasing complexity, there are now also more opportunities for global diversification. Consequently, globalization also offers opportunities for broader risk diversification.

Mr. A. Jain claims that a successful global firm (like Deutsche Bank) will necessarily be global in reach and ambition, but it will also be local in understanding and execution. It will do business with large, sophisticated clients in world-scale financial centres but it will be no less attentive to clients in regions of lesser importance but promising future. As a solution, it will generate value by fostering connectivity between these locations; by taking products developed in global financial centres and tailoring them for distribution locally and vice versa.

But what about competition on the local markets? Is it that easy for a global player to win the race for a local transaction? And with ever growing competition and a shift to specialization will the giants be successful basing on their image and global position? In my opinion, the only way of remaining global and having local understanding and execution is to co-operate with a local firm, which often operates in a niche or specializes in a more narrow segment. Not only do they have the knowledge and understanding of the specificities of the local business but also employ local people.

Even in the times of globalization, the human factor tends to play ever increasing role as differences in IT solutions, access to information or other fixed assets are less and less visible between the top players in the business. It is the employees and company’s culture that make the difference. And it is also important to add that in today’s world outside-business contacts can make you win a transaction even in the most transparent bidding process… The stakes are high thus it is worth every effort.

Another important matter which derives from globalization and was, for some reason, omitted in the article is the fact that after years of outsourcing technology support and other back-office operations to countries like India and China, financial institutions are increasingly looking to move large portions of their investment banking operations abroad. As a result, what began as technology support is now becoming more of analytic operations.

Most of the large financial institutions were in the IT side of outsourcing but as they leveraged that experience, they got more interested in moving more of their investment banking and research activities abroad. JPMorgan Chase, for example, is taking its investment banking activities abroad a step further.

The company was one of the first investment banks to not only transfer the company’s back-office and call-centre operations but to also hire research analysts in India, Hong Kong and Singapore to complement its U.S.-based research team. Some experts expect that as banks become more comfortable with their offshore operations and foreign talent becomes more attuned to the companies’ way of doing business, financial institutions may even shift some deal-making responsibility onto its foreign employees.

The Deloitte Touche Tohmatsu report indicated that offshore operations give financial services companies a foothold in new and emerging markets such as China, where there are more revenue opportunities than mature markets like the U.S. The report also predicts that driven by the need to take aggressive cost-cutting measures, the financial services industry will move 20 percent of its total costs base offshore by the end of 2010, compared to the current average of 3.5 percent.

“I believe the industry has reached such a level of globalization that it matters less and less where the actual research is generated and matters more what the cost of generating those products are” said Richard Bove, analyst at Punk Ziegel & Co. “Banks can’t afford not to do outsourcing any more.”

The investment banking industry is constantly changing. Areas such as M&A advisory have become much more challenging – while other fields such as mortgages and derivatives business didn’t even exist in the early seventies. More than half of today’s revenues in investment banking are generated by products which didn’t exist 30 years ago. This is, again above all, due to globalization.

We can only be absolutely sure of one thing: that we can’t predict future developments. However, I believe that the process of globalization is definitely set to continue and will bring with it major challenges for all industries. China will also continue to play an ever greater role, be it in terms of the outsourcing of manufacturing and services to China or the exploding Chinese market.