The Investment Banking sector has a very important role to play in the global economic recovery, although being blamed for causing the world financial crisis in the first place. A sustainable recovery must be driven by quality job creation, which can only be as a direct result of financing new projects, with stronger independent oversight to identify potential risk. Regulators of the world’s largest economies have been analyzing the problems and devising solutions to save and repair the image of the sector.Investment Banking brings together viable projects and needed funding. All major developments in the world, over the recent past, were funded through investment banking activities. Bringing inventions to market, modernizing infrastructure or expanding capabilities, all required unique and creative funding solutions. A mixed of debt and equity funding that would restrict short-term debt repayments, allowing for a healthy cash flow position, while the project is not generating income, clearly understanding the risk associated with medium to long-term revenue streams. Investment bankers sell the calculated risk to large corporations and wealthy individuals who can afford the losses but buy-in for the long-term gains.
Many retail banks follow a conservative philosophy, and rightfully so, to protect depositors money resulting in a very low return on deposits that are exposed to very little risk. These banks’ shareholders however, expect and demand returns that increase year over year, driving the banks’ executives to take more risk. Hence, the traditional banks servicing hundreds of thousands of customers’ accounts, with cash deposits, consumer loans, conveniently located banking machines network, online banking and in some cases, mortgage bridging, exposed its own cash reserves and depositors’ funds to the volatile world of investment banking to appease shareholders.
Financial regulators worldwide have at least agreed on one thing, to set a clear separation between investment banking operations and retail banking to avoid mistakes of the recent past. Noting the retail banking services does not create new jobs and investment banking activities does, regulators are soon to structure new operational guidelines for the sector. Guidelines that in all probability resemble the Mutual Fund industry, which calls for a prospectus to be filed with the relevant authorities and this prospectus must accompany and is referred to in all marketing materials, to ensure potential equity investors understand and agree with the level of risk involved.
An informed investor limits only a small percentage of funds under management or net worth to high risk, high returns financial instruments. Further protection is offered as relates to the size of the investment, such as a seat on the board of directors or executive oversight. So whether set up to produce and market electric automobiles, modernizing a mass transit system or expanding port operations, investment banking must attract the funds and therefore, has its place in all our future.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
