Merchant and Investment Banking

Department of Business Studies Module Title: Merchant and Investment Banking Submitted by: Salah Uddin Mohammad Riyadh ID: 12SU012BIF I ensure that to the best of my knowledge, the Signature: Date: work submitted by me (i.e. the student named above) is original and has been completed independently. * * All work will be subject to PLAGIARISM checks once the assignments are submitted. PLAGIARISM is considered a serious offence and will automatically lead to a FAIL grade. Contents 1. Discuss how the changes and economic evolvement set out banking services and their specialization. ................................................................................................................................. 3 2. Explain how the functions of Merchant and Investment banks effectively merge in the required banking service roles in financial service industry. .......................................................................... 4 3. Discuss the corporate issues that require specialized services relevant to banking and how the relevant service providers are different from retail banks with the portfolio of their services. .......... 5 4. Providing services is the key source of earnings of any banking business. What kind of competencies do the Merchant banks require to sustain with the clients’ ever changing needs and generating profit thereby? ............................................................................................................... 6 5. Critically analyze the importance of liquidity for any business entity and then relate the arguments with an Illustration of an appropriate example showing how the merchant banks maintain liquidity and why it is crucial for their specific business type. ......................................................... 7 6. Explain the capital needs of a merchant bank’s day to day business and how their ordinary operations help in generating required capital. Discuss why it is important for them to have access to adequate level of capital. ............................................................................................................. 8 7. Capital loss is the ultimate result of any inefficient investment decision making or unfortunate business collapse. Critically appraise the possible causes of capital loss for a merchant bank and what could be consequences of an event like this for any financial service provider entity? ............. 8 9. Appraise the adequacy of the rewards and remuneration packages offered in Merchant banking sector with reference of relevant arguments over the topic that is going on in the society of policy makers of the sector. ....................................................................................................................... 9 2 1. Discuss how the changes and economic evolvement set out banking services and their specialization. How the changes and economic evolvement set out banking services and their specialization is discussed in below: Merchant banks are measure non-public financial organization. Their primary sources of financial gain are PIPE financings and international trade. Their secondary financial gain sources square measure consulting, Mergers & Acquisitions facilitate and money market speculation. As the geographical area enlarged within the eighteenth and nineteenth Centuries, merchant banks prospered in London. for example, merchant bankers funded Canada’s sea Company. This era saw the evolvement of such merchant banks like Schroder’s, Warburg’s or Rothschild’s. Dutch capital benefited from the trade created by the Dutch East Indian Company. Since the eighteenth century, the role of the merchant banker has been significantly broadened to incorporate a composite of contemporary day skills. Such skills square measure inherently entrepreneurial, managerial, money and transactional. While the American Triangular Trade and Clipper ships of the nineteenth Century ought to have created major merchant banking centers in Bean town and big apple. Within the Nineteen Twenties, yank merchant banks began to get involved in capitalist relations and funding public corporations. By the Nineteen Sixties, the price of going public within the States began to extend. Several yank work shoppers lacked the resources to pay these prices. Major brokerage corporations responded by making merchant banking departments. These departments became called Investment Banks. Their role was to loan the parent brokerage firm’s consumer corporations the cash to travel public. They recovered the loan from the payoff of the Initial Public giving (IPO). 3 2. Explain how the functions of Merchant and Investment banks effectively merge in the required banking service roles in financial service industry. The functions of Merchant and Investment banks effectively merge in the required banking service roles in financial service industry are explained here: 1. Promotional Activities: A depository financial institution functions as a promoter of commercial enterprises that helps the bourgeois in conceiving an inspiration, identification of comes, getting ready practicable reports, getting Government approvals and incentives, etc. 2. Issue Management: The perform of a merchant banker had been chiefly confined to the management of latest public problems with company securities by the new shaped firms, existing firms (further issues) and therefore the foreign firms. 3. Credit Syndication: Merchant banks give specialized services in preparation of project, loan applications for raising short-run furthermore as long- term credit from varied bank and money establishments, etc. They additionally manage Euro-issues and facilitate in raising funds abroad. 4. Portfolio Management: Merchant banks supply services not solely to the businesses supply the securities however additionally to the investors. They advise their purchasers, principally institutional investors, concerning investment selections. 5. Alternative specialized Services: In addition to the essential activities involving selling of securities, businessperson banks additionally give company consultation services on problems like mergers and amalgamations, tax matters, achievement of executives and price and management audit, etc. 4 3. Discuss the corporate issues that require specialized services relevant to banking and how the relevant service providers are different from retail banks with the portfolio of their services. Generally, modern retail banks offer following services to customers or public: a. Accepting Deposit b. Advancing Of Loans c. Discounting Of bill of exchange d. Cheque Payment e. Remittance f. Collection And Payment Of Credit Instruments g. Foreign Currency Exchange h. Consultancy i. Bank Guarantee But Merchant & Investment banking is a service business. Typically, merchant & Investment banking group these days provides world-wide some or all of the subsequent services, either in divisions of the bank or in associated corporations among the group:  Mergers and Acquisition Advisory  Placement of Debt and Equity  Securities Underwriting  Management of Capital issues  Management of Buyback and takeovers  Corporate Advisory Services  Project Advisory Services  Other services like Restructuring/Sales, Real Estate and so on. The core services provided by Merchant & Investment banks are in the areas of debt market, equity market and advisory services. 5 4. Providing services is the key source of earnings of any banking business. What kind of competencies do the Merchant banks require to sustain with the clients’ ever changing needs and generating profit thereby? Merchant banking means that the activity of rendering variety of services as well as Management of securities, Portfolio management, Underwriting and Insurance, financial recommendation and project direction etc. giant brokers, Mutual Funds, risk capital firms and Investment Banks supply merchant Banking services. Merchant banks generate profit by offering these services: 1. Underwriting of shares and debentures 2. Corporate Advisory services. 3. Management of Public issues 4. Leasing and financing 5. Project finance and project promotion services. 6. Portfolio management 7. Treasury management services 8. Credit syndication. 9. Disbursement of dividends. 10. Investment services for nonresident. 11. Management of off shore funds. 12. Foreign collaborations and foreign currency management. 13. Counseling small scale business organizations 6 5. Critically analyze the importance of liquidity for any business entity and then relate the arguments with an Illustration of an appropriate example showing how the merchant banks maintain liquidity and why it is crucial for their specific business type. Importance of liquidity for any business entity: Liquidity is vital to own in times of crisis or emergency as a result of they're so simply regenerate into money. While not liquidity, cash will become engaged in systems that are tough to cash out of and even harder to assess for actual money price. Throughout times of emergency, massive money establishments stop working, creating it troublesome for individuals to access the money they have to shop for necessities like food, petrol and alternative emergency provides. Liquidity is additionally used to verify the money health of a business or personal investment portfolio. Liquidity not solely helps make sure that someone or business perpetually includes a reliable provider of cash close at hand, however it's a strong tool once it involves crucial the financial health of future investments also. Merchant banks maintain liquidity by executing these processes:  Merchant bank have a sound method for characteristic, measuring, observation and dominant liquidity risk.  Merchant bank actively manage liquidity risk exposures and funding desires among and across legal entities, business lines and currencies, taking into consideration legal, restrictive and operational limitations to the interchangeability of liquidity.  Merchant bank establish a funding strategy that gives effective diversification within the sources and tenor of funding.  Merchant bank actively manage its intraday liquidity positions and risks to satisfy payment and settlement obligations on a timely basis below each traditional and stressed conditions and therefore contribute to the sleek functioning of payment and settlement systems.  Merchant bank actively manage its collateral positions, differentiating between mired and unencumbered assets 7 6. Explain the capital needs of a merchant bank’s day to day business and how their ordinary operations help in generating required capital. Discuss why it is important for them to have access to adequate level of capital. The capital needs of a merchant bank’s day to day business and how their ordinary operations help in generating required capital is explained in below: Capital need or requirement is that the quantity of capital a bank or different establishment should hold as required by its monetary regulator. This can be typically expressed as a capital adequacy quantitative relation of equity that has got to be control as a share of risk-weighted assets. These needs are put into place to confirm that these establishments don't take on excess leverage and become insolvent. Capital necessities govern the magnitude relation of equity to debt, recorded on the liabilities and equity aspect of a firm's record. They must not be confused with reserve necessities that govern the assets aspect of a bank's balance sheet—in specific, the proportion of its assets it should hold in money or highly-liquid assets. Why it is important for them to have access to adequate level of capital: Merchant bank have access to adequate level of capital to make sure that banks in operation wit hin the business are providentially managed. The aim is to guard the banks themselves, their customers, the govt. (which is to blame for the price of deposit insurance within the event of a bank failure) and therefore the economy, by establishing rules to form positive that these banks hold enough capital to make sure continuation of a secure and economical market and ready to face up to any predictable issues. 7. Capital loss is the ultimate result of any inefficient investment decision making or unfortunate business collapse. Critically appraise the possible causes of capital loss for a merchant bank and what could be consequences of an event like this for any financial service provider entity? The possible causes of capital loss for a merchant bank: A client could fail to form a payment due on a real estate loan, credit card, line of credit, or alternative loan. A business or bond certificate establishment doesn't build a payment on a coupon or principal payment once due. A company is unable to repay asset-secured mounted or floating charge debt. 8 When an insolvent bank fails to return funds to the merchant bank. A business or client doesn't pay a trade invoice once due. A business doesn't pay associate employee's attained wages once due. A government grants bankruptcy protection to associate insolvent client or business. An insolvent insurer doesn't pay a policy obligation. Consequences of capital loss for financial service provider: Financial service supplier gives liquidity to depositors and creditors by standing able to provide them money on demand. In the Consequences of capital loss, liquidity risk stemmed from the chance of bank runs. These are episodes within which depositors lose trust in their bank and withdraw their cash, either as a result of considerations concerning the bank’s economic condition or as a result of they worry that others would possibly stage runs. Such runs might create banks insolvent by initiating a series reaction that forced a fire sale of non liquid loans. 9. Appraise the adequacy of the rewards and remuneration packages offered in Merchant banking sector with reference of relevant arguments over the topic that is going on in the society of policy makers of the sector. The adequacy of the rewards and remuneration packages offered in Merchant banking sector with reference of relevant arguments over the topic that is going on in the society of policy makers of the sector is appraised in below: As the public and policymakers look for to know the elemental sources of the recent money crisis and efforts are created to style effective policy to avert future crises, a central focus has been the compensation of executives and nonexecutive workers of economic establishments. a lot of significantly, to what extent did incentive compensation encourage workers of banks and different financial companies to require excessive risks, thereby conducive to broader money instability? And what steps ought to policymakers go for make sure that future compensation systems don't encourage undue risk-taking? These are tough queries, however as luck would have it, the employment of some normal tools of theory will give helpful insights. Especially, the idea of mechanism design, whose architects were honored in 2007 with the award in economics, sheds light-weight on however institutional rules are often designed to realize best outcomes. 9 Mechanism style depends on the notion that rules ought to be “incentive compatible”. Or else, individuals tend to game the system by withholding info or being dishonest. The tools of mechanism style are especially appropriate to queries of incentive compensation—certainly; the term itself mirrors incentive compatibility. So, what will mechanism style theory tell concerning however a bank ought to style AN incentive compensation system which will best succeed its goals, and would such an incentive system inconsistency with the goals of society as a whole? To handle these problems we’ve thought of an economic framework of however banks (and similar money institutions) structure job contracts with bank workers. This framework permits Merchant banking sector to judge variety of relevant queries, including:  Should compensation be relentless earnings, or ought to it depend upon outcomes of investments created by the worker on the bank’s behalf?  What is that the best temporal order for incentive payments: as shortly because the investment is created or delayed till investment outcomes are known?  And however will government support for banks (through the security net provided by deposit insurance and otherwise) have an effect on however banks like better to compensate their employees? 10