Capital Market Players: Bankers and Brokers; Issuers of Asset-Backed Securities

Category Overview

Bankers and Brokers

Players that intermediate between issuers and investors

Bankers and brokers are the main intermediaries in capital markets.

Their activities are highly regulated by multiple agencies.

Many brokers are now subsidiaries of commercial banks and financial conglomerates.

Overview: Capital Market Players

The Repeal of Glass-Steagall

Following the Crash of 1929, strict regulation of banks and brokers was introduced with the Glass-Steagall Act that separated banking from the stock market and with banking reforms that prohibited interest-rate competition for deposits and that encouraged sound lending practices.

By the 1950s, the U.S. banking system was the strongest in the world, with banks focusing on short-term, self-liquidating loans, and with little business relating to stock market speculation.

By the end of the century, most of these reforms had been revoked.

Marketing-oriented Banking

Citibank chief executive, Walter Wriston, hired McKinsey & Company in the 1960s to revamp management of the world's largest bank.

The result was a marketing-oriented system in which a credit officer's bonus depended upon the volume of loans sold and approved. This system has been copied by banks, worldwide.

Bankers and Brokers; Issuers of Asset-Backed SecuritiesBankers and brokers are the main intermediaries in capital markets.

Major banks are now run by professional managers, usually remunerated with stock options tied to short-term performance goals.

This has led to term lending and aggressive marketing of financial products by special product divisions.

Non-diversifiable Risk

With the revocation of Glass-Steagall, banks now hold trading positions and have non-diversified, over-the-counter derivative liabilities that sometimes exceed capital and reserves.

These derivative portfolios are essentially bets on exchange and interest rates.

Banks have grown so large and complex that it is doubtful that anyone fully understands the risks.

The bailout of Long Term Capital Management in the late 1990s revealed the degree to which major banks were trading derivatives.

This, together with the failure of lending programs of American banks in Latin America (1980s) and Asia (1990s), suggests that bank regulation may not be up to the complexity of the system.

copyright | privacy | home