BIP 390 - End-Of-Chapter Questions & Answers Chapter 1 Overview of Investment Banking: 1. Looking at the leverage ratios of former pure-play investment banks GS and MS in exhibit 1.4, why were these banks able to operate at higher leverage ratios as investment banks compared to bank holding companies? Bank holding companies are required to comply with Fed leverage regulations. Pure-play investment banks did not operate deposit-taking businesses and therefore were only regulated by the SEC. Therefore they were able to operate with higher leverage ratios due to less regulation. 2. U.S. companies currently report their financials based on U.S. GAAP rules. Many companies in Europe report according to IFRS rules. There has been a movement for all companies to shift to an IFRS basis globally. When this occurs what may happen to the leverage ratios of U.S. banks? IFRS shows gross exposure in accounting for derivatives, non- derivative trading assets & reverse repos/borrowed securities, while U.S. GAAP shows values on a net basis. Switching to IFRS will result in higher leverage ratio – US banks will need to cut leverage further under current Fed’s regulation. 3. Why might a universal bank be better able to compete against a pure play investment bank for M&A and other investment banking engagements? Universal banks have more stable and have countercyclical business cycles and are better able to compete internationally. Universal banks, like Citigroup, were able to develop a broad-based investment banking business, hire professionals from other pure-play investment banks and use
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Sep 26, 2015
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BIP 390 - End-Of-Chapter Questions & Answers
Chapter 1 Overview of Investment Banking:1. Looking at the leverage ratios of former pure-play investment banks GS and MS in exhibit 1.4, why were these banks able to operate at higher leverage ratios as investment banks compared to bank holding companies?Bank holding companies are required to comply with Fed leverage regulations. Pure-play investment banks did not operate deposit-taking businesses and therefore were only regulated by the SEC. Therefore they were able to operate with higher leverage ratios due to less regulation.2. U.S. companies currently report their financials based on U.S. GAAP rules. Many companies in Europe report according to IFRS rules. There has been a movement for all companies to shift to an IFRS basis globally. When this occurs what may happen to the leverage ratios of U.S. banks?IFRS shows gross exposure in accounting for derivatives, non-derivative tradingassets & reverse repos/borrowed securities, while U.S. GAAP shows values on a net basis. Switching to IFRS will result in higher leverage ratio US banks will need to cut leverage further under current Feds regulation.3. Why might a universal bank be better able to compete against a pure play investment bank for M&A and other investment banking engagements?Universal banks have more stable and have countercyclical business cycles and are better able to compete internationally. Universal banks, like Citigroup, were able to develop a broad-based investment banking business, hire professionals from other pure-play investment banks and use their significant lending capability as a platform to capture greater IB market share.---->Not sure on this part from Tians notes, I think this is describing a bank holding company, not necessarily a universal bank: A universal bank has stable deposit-taking business, lower capital risk, access to discount window, FDIC guarantees (
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