Can anyone explain to me the issue of Pure IB model
So I understand that GS/MS and the other banks that failed are independent investment banks without commercial parts.
And this having to do with risk exposure and etc.
Can anyone write a paragraph not too technical explaining this? Thanks.
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One of the reasons is that
One of the reasons is that IBs under Commercial banks are more diversified, therefore, less risky and better credit rating.
An investment bank under the
An investment bank under the wing of a commercial bank has access to customer deposits.
That is the main reason.
Balance Sheet
Commercial banks have much larger balance sheets than pure-play investment banks.
The integrated model, which is the traditionnal one in Europe and has only come to life in the US recently due to the demise of Glass-Stegal, allows the investment banking arm of a commercial bank to use all the deposits of the retail bank to fund its activities.
I-banks don't have deposits so they rely on open-market funding methods such as repos and securitisation. Also, I-banks have moved away from the advisory model to taking an increasing number of actual positions, thus increasing reliance on open-market funding
Basically capital is cheaper
Basically capital is cheaper for diversified banks.
...about deposits
An investment bank under the wing of a commercial bank has access to customer deposits.
That is the main reason.
Don't tell David Viniar that.
Investment banks have to
Investment banks have to mark-to-market their assets daily. While Commercial banks can hold assets to maturity, and will only have to make a mark if they sell the asset.
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Investment banks have to mark-to-market their assets daily. While Commercial banks can hold assets to maturity, and will only have to make a mark if they sell the asset.
Interesting, I didn't know this. Is this one of the FAS amendments?
...
...the investmenr banking arms of banks still have to mark there assets to market. For example BofA dosent get to just carry MBS at par they have to mark it...only if they move the assets to their banking arm do they get to not mark it and it that case they wouldnt be able to trade them in the same way. This is not the reason banks are preferable to pure brokers. As mentioned above, it is the banks access to retail deposits which can serve as a stable form of financing in tough times. Brokers have to rely on short-term funding markets which have totally dried up and may never return in the same way.