2.1.2 Investment banks after the financial crisis
The investment banks should be seen as distinct from the commercial banks because their activities are almost entirely focused on institutional (wholesale) business rather than personal (retail) financial services – i.e. they do business with other firms rather than with individuals.
However, these banks do play a key role in the industry because they are players in the markets where core financial products like shares and securities are traded. Indeed, as we saw in Week 1, they incorporate the majority of the old member firms of the London Stock Exchange. They have also incorporated – largely through acquisition after Big Bang – the so-called merchant banks that specialised in organising trade finance for firms.
The merchant banks thrived on international trade, providing credit to importers and exporters as well as financing ships to fetch tea, coffee, precious metals, silks and spices. They had agents in the US, South America and the Far East, and helped foreign states to raise money on the Stock Exchange. After the First World War, they adopted a more UK-focused approach and were involved in raising debt finance and equity finance for British industry. From the early 1970s, they became involved in early foreign currency loans and the Eurobond market. Starting in the 1950s and 1960s, the merchant banks also made a name for themselves by acting for corporate clients in takeovers and mergers. They also had investment departments which managed money for institutions and wealthy private clients, as well as offering pooled investment funds for less-well-off individuals. The major difference from the investment banks was that the merchant banks were much smaller, with less capital, preferring to make money on commission and advice rather than risking their own funds. After Big Bang, which liberalised the UK financial services industry, the merchant banks had to compete with the US investment banks that started to arrive in London.
The following years were eventful for the merchant banking sector. Barings became insolvent as a result of the losses amassed by the rogue trader Nick Leeson in Singapore, and was sold to ING for £1; Warburgs was bought by the Swiss Bank Corporation, and Morgan Grenfell by Deutsche Bank. A few merchant banks remain in the UK including N.M. Rothschild & Sons Ltd, Close Brothers and Lazards, whose London office merged with other Lazard firms across the world. A once great group of banks has, however, almost disappeared.