Wholesale Banking Issues
There are many factors that affect the wholesale banking sector. Commercial lending is becoming a shrinking market.
Competition has forced loan charges down to levels, which are scarcely profitable. The growth of international capital markets is such that bond and equity issues over the last 10 years have increased their share at the expense of bank loans. A single market for corporate bonds denominated in the in the euro hastens the substitution of bond issues for corporate loans in mainland Europe, which has so far been a market for bank loans have traditionally been a more popular source of finance and bond issues.
One consequence of this has been a move to riskier but potentially more profitable loans. Corporate debt generally is increasing. Attracted by low interest rates, corporations are borrowing to buy back equity -- currently all the rage and espoused by financial theorists claiming that debt is cheaper than equity and citing classic financial theory, which proves that the post-tax profits of the firm and therefore its share price will increase if it finances itself with that rather than equity (subject to a few practical assumptions, not the least, the firm's credit rating). Another consequence of this pressure on profit from lending is to take high quality, but low margin loans off the balance sheet and sell them as securities(we all know how this can go south).
A final consequence for commercial banks is to seek salvation by buying investment banks. These moves have not always met with success. Both Barclays and National Westminster Bank in the UK have lost a great deal of money through their investment banking subsidiaries, and made heavy cuts in their involvement. Commercial banking and investment banking are cultures that are very different, and merging them causes severe problems. The belief seems to be that the bank should offer clients the full range of services, but to clients really care? Clients frequently use one bank for bond issues and another for corporate loans, and fail to see any particular disadvantage.
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