Evaluating The Institutional Impact Of The Crisis And Subsequent Reforms



Evaluating The Institutional Impact Of The Crisis And Subsequent Reforms

Introduction

The international banking crisis has seriously affected United States in many ways. Government's broad intervention in the U.S., Germany, the UK, France, and other EU countries undermines the legitimacy of the market economy and also creates social and political tensions; specifically, as many workers face unemployment, the question of why taxpayers' money is put into ailing banks will arise, even though the rise of overall unemployment is a collateral effect of the banking crisis.

The euro-zone's financial market stability was relatively satisfactory, while the epicenter of the banking crisis was in the United States and to some extent in the UK, where banking supervisors had followed a similar benign neglect-attitude as their counterparts in the United States. In the euro-zone, Spain, and to some extent Italy, pursued rather strict regulatory approaches, which have helped them to avoid facing major subprime problems.

Structure Of Investment Banks (US)

The literature sharply distinguishes between bank- and market-based financial systems. On the one hand, in bank-based systems intermediaries establish long-term relationships with firms and keep loans in their balance sheets. On the other hand, in market-based systems firms sell their securities directly to investors (in 'direct' markets business firms are supposed to meet face to face with investors), who form portfolios to diversify risks. Nevertheless, while this distinction is useful to think about striking cross country differences among financial systems it obscures that in developed security markets firms sell their securities through investment banks with whom they establish long-term relationships.

This is well documented for the U.S. market, the paradigmatic market-based system. Until about 25 years ago the rule in the industry was that a firm would maintain relationships with only one investment bank. This has changed in the recent past, but it is still the case that firms establish long-term relationships. For example, Baker (2008) examined ties between investment banks and corporations with market value of more than $50 million between 1981 and 1985. He reports that the 1091 corporations that made two or more deals during this period used three lead banks on average (these firms made eight deals on average). All but nine granted more than 50% of their business to their top three banks and, on average, 59% of the business was allocated to the top bank. Similarly, Eccles and Crane (2009) report that among the 500 most active corporations in the market between 1984 and 1986, 55.6% used predominantly one bank to float their securities, and the rest maintained relationships with only a few banks. They did not find any corporation selecting underwriters on a deal-by-deal basis. James (2005) finds that in the first common stock security offering after an IPO, 72% of firms choose the same lead bank as before; for debt offerings, 65% of issuers do not switch banks. Similarly, Krigman et al. (2001) show that 69% of firms that did an IPO between 1993 and 1995, and a seasoned equity offering ...