Post on 30-May-2020
Financial Services Dynamics
Prof. Ingo WalterNew York University
Not for public use © Ingo Walter 2002
ENVIRONMENTAL DRIVERS TRANSACTIONSINFRASTRUCTURE:
PaymentsExchangeClearanceSettlementCustody
INFORMATIONINFRASTRUCTURE:
Market DataResearchRatings
DiagnosticsCompliance
Information AdvantagesInterpretation Advantages
Transaction cost Advantages
Risk Transformation (Swaps, Forwards, Futures, Options)
Brokerage & TradingProprietary / Client-Driven
SecuritiesBroker/Dealers (B)
Banks (A)
Direct-connectLinkages (C)
DistributionOrigination
SecuritiesNew Issues
Loans &Advances
USERS OF FUNDSHouseholdsCorporates
Governments
SecuritiesInvestments
Deposits &Certificates
SOURCES OF FUNDSHouseholdsCorporates
Governments
CollectiveInvestment
Vehicles
Source: Roy C. Smith and Ingo Walter, Global Banking (New York: Oxford University Press, 1997).
0
10
20
30
40
1970 1980 1990 2000
Commercial Banks
Insurance Companies
Pension Funds
Mutual Funds
PercentU.S. Financial Assets, 1970 – 2000
Source: Federal Reserve
Private Asset Allocation in German Households
4.4
31.4
20.6
38.4
5.2 10.4
26.6
23.3
27.4
12.3
Insurance
Others*
Investment funds
Stocks
Insurance
Short-termInvest-mentswith banks
Stocks
Investment funds1990 (%) 2000 (%)
Others*
Short-term investments with banks
*includes fixed interest deposits, long-term investments with banks and buildingsociety deposits
Sources: Tecis; JP Morgan
Household Asset Allocation, Japan(2001)
Stocks5.5%
Bonds6.1%
Savings Deposits52.0%
Demand Deposits11.3%
Insurance & Pension
funds25.1%
Source: Datastream
Banks’ Share in Financial Intermediation
0 20 40 60 80 100
United States
United Kingdom
Netherlands
France
Spain
Germany
Italy
Switzerland
Austria
%
ENVIRONMENTAL DRIVERS TRANSACTIONSINFRASTRUCTURE:
PaymentsExchangeClearanceSettlementCustody
INFORMATIONINFRASTRUCTURE:
Market DataResearchRatings
DiagnosticsCompliance
Information AdvantagesInterpretation Advantages
Transaction cost Advantages
Risk Transformation (Swaps, Forwards, Futures, Options)
Brokerage & TradingProprietary / Client-Driven
SecuritiesBroker/Dealers (B)
Banks (A)
Direct-connectLinkages (C)
DistributionOrigination
SecuritiesNew Issues
Loans &Advances
USERS OF FUNDSHouseholdsCorporates
Governments
SecuritiesInvestments
Deposits &Certificates
SOURCES OF FUNDSHouseholdsCorporates
Governments
CollectiveInvestment
Vehicles
Source: Roy C. Smith and Ingo Walter, Global Banking (New York: Oxford University Press, 1997).
Debt Outstanding, 2000
0
20
40
60
80
100
Long
-term
Non
finan
cial
Cor
pora
te L
iabi
litie
s (p
erce
nt)
U.S.
Japa
n
Fran
ce
Spain
Neth
erlan
ds Italy
Belgi
um
Germ
any
Swed
en
Bank Borrowing Bonds
Source: Organization for Economic Cooperation and Development
Total Securitization Market, 1985-2001($bn outstanding)
0
500
1000
1500
2000
2500
3000
3500
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: CS First Boston (1985-95 data); Moody’s, Schroder Salomon Smith Barney, Merrill Lynch (1996-1997 YTD data)
U.S.
Europe
ENVIRONMENTAL DRIVERS TRANSACTIONSINFRASTRUCTURE:
PaymentsExchangeClearanceSettlementCustody
INFORMATIONINFRASTRUCTURE:
Market DataResearchRatings
DiagnosticsCompliance
Information AdvantagesInterpretation Advantages
Transaction cost Advantages
Risk Transformation (Swaps, Forwards, Futures, Options)
Brokerage & TradingProprietary / Client-Driven
SecuritiesBroker/Dealers (B)
Banks (A)
Direct-connectLinkages (C)
DistributionOrigination
SecuritiesNew Issues
Loans &Advances
USERS OF FUNDSHouseholdsCorporates
Governments
SecuritiesInvestments
Deposits &Certificates
SOURCES OF FUNDSHouseholdsCorporates
Governments
CollectiveInvestment
Vehicles
Source: Roy C. Smith and Ingo Walter, Global Banking (New York: Oxford University Press, 1997).
The US Financial Services Sector, 1950
InstitutionPayment Services
Savings Prod.
Fiduc. Services
Insurance and Risk
Mgt. ProductsDebtEquityRetailBusiness
Insured Depository Institutions
InsuranceCompanies
Finance Companies
Securities Firms
Pension Funds
Mutual Funds
Underwriting Issuance ofLendingFunction
Minor involvement
The US Financial Services Sector, 2001
Institution
Payment Services
Savings Prod.
Fiduc. Services
Insurance and Risk Mgt. Products
DebtEquityRetailBusiness
Underwriting Issuance ofLendingFunction
Insured Depository Institutions
InsuranceCompanies
Finance Companies
Securities Firms
Pension Funds
Mutual Funds
Diversified Financial Firms
Specialist Firms
Selective involvement of large firms via affiliates
Financial Services Concentration Ratios
1995 2000 1995 2000 1995 2000 1990 2000 1990 2000 1990 2000
45%
55%
39%
61%
26.7%
39.7%37%
61.9%
26%
61%
40%
92.5%
40.6%
92.5%
Retail BankingPercentage of totaldeposits held bytop 30 bank holdingcompaniesTotal deposits:$3.6 trillion
MortgageOriginationPercentage oforiginationby top 10;ranked by valueof loans out-standingTotal originations:$1.073 trillion
Credit CardsPercentage oftotal credit issuedby top five; rankedby value of out-standingsTotal industryOutstanding:$478.7 billion
Corporate LendingPercentage of syndicated loansto large corporationin which the top fiveplayers served as theagent bank*Total syndicatedloans outstanding:$1.9 trillion
Custody BanksPercentage of total Held by top 10; ranked by global assets undermanagementTotal world-wideAssets underManagement:$37.24 trillion (approx.)
Investment BankingPercentage of wholesaleorigination held bytop-ten firms (global)Volume: $11.5 trillion
Other banksthrifts andcredit unions
Bank holdingCos.
*The agent bank arranges a financing pool in which other banks participate.Sources: First Manhattan Consulting Group; Inside Mortgage Finance; the Nilson Report; Loan Pricing Corp.; Federal Reserve; Institutional Investor
ENVIRONMENTAL DRIVERS TRANSACTIONSINFRASTRUCTURE:
PaymentsExchangeClearanceSettlementCustody
INFORMATIONINFRASTRUCTURE:
Market DataResearchRatings
DiagnosticsCompliance
Information AdvantagesInterpretation Advantages
Transaction cost Advantages
Risk Transformation (Swaps, Forwards, Futures, Options)
Brokerage & TradingProprietary / Client-Driven
SecuritiesBroker/Dealers (B)
Banks (A)
Direct-connectLinkages (C)
DistributionOrigination
SecuritiesNew Issues
Loans &Advances
USERS OF FUNDSHouseholdsCorporates
Governments
SecuritiesInvestments
Deposits &Certificates
SOURCES OF FUNDSHouseholdsCorporates
Governments
CollectiveInvestment
Vehicles
Source: Roy C. Smith and Ingo Walter, Global Banking (New York: Oxford University Press, 1997).
The US Financial System in Global Perspective, 2000
US Share of global:Population 4.5%GDP 28.9%Loans:Banking assets 10.6%Syndicated lending 13.5%Securities:Bond market capitalization 44.9%Stock market capitalization 50.0%Non-government debt issues 53.2%Stock new issues 57.0%Completed M&A 52.8%Managed assets:Funded pension assets 59.4%Mutual fund assets (non-pension) 53.0%Intermediation:Loan lead-managers 77.2%Debt & equity bookrunners 66.3%M&A advisory 78.6%
STRUCTURE OF FINANCIAL INSTITUTIONS 1
United States Europe*Commercial banksSavings institutionsCredit UnionsFinance companiesSecurities brokerageOn-line brokerageInvestment banksMutual fund companiesMortgage companiesInsurance companies
BanksBanksBanksBanksBanksBanksBanksMainly affiliates of banksAffiliates of banks and mortgage banksInsurance companies & bancassuranceaffilates of banks
* Significant inter-country differences exist among European markets.1 Adapted from Gunter Dufey “The Blurring Borders of Banking”.
The European Financial Services Sector, 2001
Institution
Payment Services
Savings Prod.
Fiduc.Services
Insurance and Risk Mgt. Products
DebtEquityRetailBusiness
Underwriting Issuance ofLendingFunction
Insured Depository Institutions
InsuranceCompanies
Finance Companies
Securities Firms
Pension Funds
Mutual Funds
Diversified Financial Firms
Specialist Firms
Selective involvement of large firms via affiliates
ENVIRONMENTAL DRIVERS TRANSACTIONSINFRASTRUCTURE:
PaymentsExchangeClearanceSettlementCustody
INFORMATIONINFRASTRUCTURE:
Market DataResearchRatings
DiagnosticsCompliance
Information AdvantagesInterpretation Advantages
Transaction cost Advantages
Risk Transformation (Swaps, Forwards, Futures, Options)
Brokerage & TradingProprietary / Client-Driven
SecuritiesBroker/Dealers (B)
Banks (A)
Direct-connectLinkages (C)
DistributionOrigination
SecuritiesNew Issues
Loans &Advances
USERS OF FUNDSHouseholdsCorporates
Governments
SecuritiesInvestments
Deposits &Certificates
SOURCES OF FUNDSHouseholdsCorporates
Governments
CollectiveInvestment
Vehicles
Source: Roy C. Smith and Ingo Walter, Global Banking (New York: Oxford University Press, 1997).
E – Applications in Financial Services (January 2001)
Retail banking:On-line banking (CS Group, Bank-24, E*loan, Amex MembershipB@nking, ING Direct, Egg)
Insurance:ECoverage (P&C) [defunct 2002]EPrudential term and variable life
Retail brokerage:E-brokerage (Merrill Lynch, MSDW, Fidelity, Schwab, E*trade, DJL Direct, Consors)
Specialized financial Financial Telecom/utilityservice providers conglomerates companies
LendingTree.com, DollarDEX.com, AdvanceMortgage.com, Insweb.com
Citi Privatenetworks
Vertically integrated
financial conglomerates
Vert i call y in tegrat ed m
i xed congl om
erat es
Brick and Mortar PC with Modem TV Phone Kiosk Wireless Device
Alternative Services and Delivery Channels
Electronicenablers
S1, Checkfree, Sanchez, System Access, Back-office
Home banking, Mortgages, brokerage, Insurance, e-Wallets,Electronic bill presentment and payment services, Checking,Business services, Credit cards
Financialproducts
Financialinstitutions
Aggregators
Portals
Accessdevices
Source: Claessens, Glaessner, Klingebiel, World Bank, 2000
E-Finance Penetration in Industrial Countries
8.3733212Germany
8.21182France
8.211020Finland
8.41,192386Denmark
8.2204Belgium
8.110224Australia
8.2427278Industrial country average
Business Environment Ranking, 2000-04
E-money (number of merchant terminals per 100,000 people)
Online brokerage (transactions as % of brokerage transactions)
Online banking (customers as % of bank customers)
Country
E-Finance Penetration in Industrial Countries (Cont’d)Banking Brokerage E-money Environment
8.34185531Sweden
8.83266United Kingdom
8.735566United States
8.025182Spain
8.6332105Singapore
7.658972Portugal
8.01,059258Norway
8.81,8984015Netherlands
7.432Japan
7.77161Italy
Estimated Impact of E-Finance on Bank Net Interest Margins, 2005 and 2010
1.671.9520012.37Germany
1.611.6620011.72Austria
1.571.4220001.14Ireland
1.992.8420033.30France
1.601.5919981.57Finland
1.682.2019984.20Denmark
1.521.3420031.25Belgium-Luxembourg
1.641.8220012.03Australia
1.691.962.34Industrial country average
Net Interest Margin, 2010
Net Interest Margin, 2005
Start of Rapid Growth
Net Interest Margin, 1997
National economy
1.611.6519991.75Switzerland
1.631.8219982.46Sweden
1.702.0920012.57United Kingdom
1.872.9120014.06United States
1.862.6220023.19Spain
1.671.9520012.30Singapore
1.661.7620041.81Portugal
1.631.8219982.55Norway
1.601.6120021.62Netherlands
1.621.7220011.84Japan
1.932.5020042.74Italy
Estimated Impact of E-Finance on Bank Net Interest Margins, 2005 and 2010 (Cont’d)
NIM 1997 Launch NIM 2005 NIM 2010
Merrill Lynch 2000 Net Revenues($26.8 billion)
Merrill Lynch Investment Management (MLIM) 9%
Private Client Group (PCG)45%
Corporate & Institutional Client Group (CICG) 46%
Data: Merrill Lynch
U.S. Securities Firms Ranked By Number of Brokers World-Wide, as of Jan 1, 2000
18,100
13,072
11,333
8,165
7,576
6,682
6,398A.G. Edwards, Inc.
Prudential Securities
PaineWebber
Charles Schwab
Salomon Smith Barney
Morgan Stanley Dean Witter
Merril Lynch
Source: Securities Industry Association
Merrill and Schwab Market Capitalization, $bn
0
10
20
30
40
50
60
1998 1999 2000 2001
Charles Schwab
Merrill Lynch
@
Source: Thomson Financial Datastream
MSDW Client Options1. Traditional brokerage relationship at traditional price points.2. MSDW Online account: Discounted trades at $29.95-$39.95.3. MSDW Choice wrap account: Access to a broker + unlimited on-line ($29.95)
and off-line (39.95) trading – additional fees for orders exceeding 1,000 shares.Brokers can negotiate individual charges.
1.00%
1.00%
1.00%
1.00%
0.75%
0.75%
0.50%
0.50%
0.50%
0.50%
2.25%
2.25%
1.75%
1.25%
1.25%
0.90%
0.85%
0.85%
0.50%
0.30%
0-$99,000
$150,000
$250,000
$250,000
$250,000
$1,000,000
$1,000,000
$2,000,000
$5,000,000
$10,000,000+
Next
Mutual Fund/
Fixed IncomeEquity
Account
Asset Level
Source: Morgan Stanley Dean Witter
Top E-brokerage Players, 2001
Merrill LynchPrudential FinancialCitigroupPaineWebberCSFB DirectDiscover Brokerage DirectSchwabE*TradeFidelity Investments
“Kindly explain the asset allocation approach just once more…”
E – Applications in Financial Services(January 2001)
Primary capital markets:E-based CP & bond distribution (UBS Warburg, Goldman Sachs)
E-based direct issuance:Governments (TreasuryDirect, World Bank)Municipals (Bloomberg Municipal, MuniAuction, Parity)Corporates (CapitaLink, Intervest)IPOs (W.R. Hambrecht, Wit Soundview, Schwab, E*Trade)
CapitaLink Auction Screens
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
+62
+62
+63
+64
+64
+65
+65
+66
+67
+67
+67
+68
+68
10.0
8.0
4.5
1.0
4.5
7.5
6.5
10.0
3.0
5.5
2.5
7.0
15.5
OJ
NB
YU
VL
BC
DA
GD
KI
DL
OL
HP
SM
VI
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
+54
+56
+57
+58
+59
+59
+59
+60
+61
+61
+62
+62
+62
5.5
7.0
0.5
2.5
5.0
5.0
2.5
6.0
4.5
7.0
8.0
10.0
8.0
OL
SM
VI
BQ
KI
WC
OL
MC
RB
WC
RD
CU
SB
In-MoneySpreadAMTBidderIn-MoneySpreadAMTBidder
Merrill Lynch Comments on CapitaLink
• No prior history of automated Dutch auction distribution• Lack of liquidity – Unlike underwritten issues) and Merrill will not handle any CapitaLink issues
• JP Morgan will have to provide backstop bids (denied by Morgan)• Merrill refuses to provide any pricing service on CapitaLink issues.• Unsuited to “Reverse Inquiry” trade as with MTN programs where• Funding could be driven by investor interest, hence sacrifices flexibility• Issuer gives up control of pricing• Irrevocability of bids during auction increases investor exposure to market risk
• Narrower investor base will increase funding costs• Undisciplined dealer participation may lead to violation of securities laws
• Not suited to swap-driven deals• John Deere out on a limb as first company to include CapitaLink in its program, and may attract adverse publicity, especially due to boycott by bulge bracket firms.
“Most investment bankers lead a very hard life. After they takecare of each other they have to take care of their friends. Afterthat, they have to take care of people they’d like to have asfriends. You can imagine that after all of this hard work therearen’t many IPO shares to go around.”
W.R. Hambrecht + Co. (2000)
OpenIPOTM
W.R. Hambrecht + Co.Internet-Based Dutch Auction IPO
Hambrecht sets an expected price range to provide a sense of potential value.
Investors bid price and number of shares.
Offering price is set a lowest at which all shares will be sold.
Those bidding above offering price get all bid-for shares at the offering price
Those bidding at offering price will get some (pro-rata).
Those bidding below offering price get none.
Hambrecht underwrites the shares at clearing price and sells them to investors.
Hambrecht reserves the right to limit shares to anyone bidding for over 1% of the IPO.
No more than 10% of shares can go to a single bidder.
No research – only quantitative analysis of comparables.
Fees: 3-6% (vs. 6-7%).
Reduced underpricing
First deal: 1 million shares Ravenswood Winery February 1999.
Expected dealflow: 6-12 annually.
Key issue: Quality of the deals with no inv. Banker reputation on the line.
Paired Comparison, Traditional U/W vs. E-auction
Issue Salon.com Theglobe.comUnderwriters Hambrecht & Bear Stearns &
Daiwa Volpe BrownAmount raised $26 million $28 millionFee $1.3 million $2.0 millionPrice at u/w $10.50/sh $4.50/shFirst-day close $10.07/sh $31.75/shT+90 day close $9.56/sh $19.83/shLeft on table $0 $169 millionTotal cost $1.3 million $171 million
Source: Business Week, Jan. 2000
W.R. Hambrecht + Co.IPO’s 1999-2001
Issuer Year Amount RoleRavenswood Winery 1999 $ 11.55 LMSalon.com 1999 $ 27.3 LMAndover.net 1999 $ 82.8 LMNogatech 2000 $ 42.0 LMPeet’s Coffee & Tea 2001 $ 26.4 LMBriazz 2001 $ 16.0 LMInstinet 2001 $464.0 17% (CSFB LM)Smith & Wolensky 2001 $ 45.0 LMPlato Learning 2001 $ 50.0 Follow-onInterCept Group 2001 $124.0 Follow-on
Source: W.R. Hambrecht + Co. (Website). Withdrawn IPOs include Aristotle International, Inc.(2000), Sightsound.com (2000) and GreatFood.com (2000) acquired by 1-800 FLOWERS.com.
IPO Underwriting 2000 (percent)
Online 9.9
Broker-Dealers
90.1
Wit Soundview
W.R. Hambrecht
E*Trade
Charles Schwab
68 0.3
18
10
Source: Thomson Financial Securities Data
OpenBook Debt IssuesIssuer Year Amount Role
Dow Chemical 2000 $300.0 Platform*
W.R. Hambrecht + Co.
OpenFollow-on Secondary Equity IssuesIssuer Year Amount Role
* First on-line auction of corporate debt.
FT, March 10, 1999
E – Applications in Financial Services (January 2001)
Secondary Financial MarketsForex (Atriax [defunct 2002], Currenex, Fxall (34 Banks), FX Connect)Governments (Bloomberg Bond Trader, QV Trading Systems, TradeWeb EuroMTS)Municipals (QV Trading Systems, Variable Rate Trading System)Corporates (QV Trading Systems)Government debt cross-matching (Automated Bond System, Bond Connect, Bondnet)Municipal debt cross-matching (Automated Bond System)Corporate debt cross-matching (Automated Bond System, Bond Connect, Bondlink, Bondnet Limitrader, BondBook [defunct 2001])Debt interdealer brokerage (Brokertec – 13 firms, Primex)Equities – ECNs (Instinet, Island, Redi-Book, B-Trade, Brut, Archipelago, Strike, Eclipse)Equities-cross-matching (Barclays Global Investors, Optimark)Research (Themarkets.com)
E – Applications in Financial Services (January 2001)
End-user Platforms:
Corporate finance end-user platforms (CFOWeb.com – now defunct)
Institutional investor utilities
Household finance utilities (Quicken 2001, Yodlee.com)
PC-Based Personal Finance Platform
EmployeeCredit Union
Fidelity401(k)
Account CitbankMastercard
Account ChaseCheckingAccount Schwab
BrokerageAccountWashington
Mutual HomeEquity Loan American
ExpressAccount
Home PC
Quicken 2002Platform
Prototype On-Line Personal Finance Platform
SchwabBrokerageAccount
HouseholdFinances
ChaseChecking Account
AmericanExpressAccount
EmployeeCredit Union
WashingtonMut. HomeEquity Loan
CitbankMastercard
Account
Fidelity401(k)
Account
WebserviceServer
Home PC or
Other Device
ENVIRONMENTAL DRIVERS TRANSACTIONSINFRASTRUCTURE:
PaymentsExchangeClearanceSettlementCustody
INFORMATIONINFRASTRUCTURE:
Market DataResearchRatings
DiagnosticsCompliance
Information AdvantagesInterpretation Advantages
Transaction cost Advantages
Risk Transformation (Swaps, Forwards, Futures, Options)
Brokerage & TradingProprietary / Client-Driven
SecuritiesBroker/Dealers (B)
Banks (A)
Direct-connectLinkages (C)
DistributionOrigination
SecuritiesNew Issues
Loans &Advances
USERS OF FUNDSHouseholdsCorporates
Governments
SecuritiesInvestments
Deposits &Certificates
SOURCES OF FUNDSHouseholdsCorporates
Governments
CollectiveInvestment
Vehicles
Source: Roy C. Smith and Ingo Walter, Global Banking (New York: Oxford University Press, 1997).
It is not the strongest of the species that survive,but rather the mostadaptable to change.
- Charles Darwin