Organization and Management in Investment Banks: Continental Europe, the United States, and Japan
Historically, in the process of integration and separation of their financial activities, investment banks in developed economies established the following three mainstream management models at the end of the twentieth century:
1. Continental European model (full-service German banks)
2. American model (crossover of activities)
3. Japanese model (interlocking shareholding among financial corporations)
The Continental European Model (Universal Banking) In Continental Europe, full-service banks may be a single corporation with multiple licenses pursuing a variety of activities. They are directly engaged in a full range of financial services, including banking, securities, insurance, trust, fund, leasing, derivatives, and other emerging business. In a full-service bank, several departments are set up and each takes charge of a particular type of activity. Although each department works as a relatively independent subsidiary under the central leadership of the headquarters, there is no firewall between departments. To a considerable extent, all the departments share customers. Target customers often overlap, with many new business opportunities being available in cross-selling.
The Deutsche Bank is a typical example of the Continental European model. Its investment banking division is owned by a global company and is responsible to the company's headquarters. It provides a full range of services in consulting, finance, research, risk management, and investment to individual, corporate, and government clients, as well as other financial institutions.
Organizationally, the universal banking model is clearly customer driven. A full-service bank aims to offer a "one-stop shopping" experience with a full range of financial services to retain as many quality customers as possible while expanding the customer base. This model enables a financial institution to integrate multiple financial services and allows much openness and freedom. Its flexible arrangement facilitates the sharing of resources and the flow of information and enables the institution to benefit from information superiority. Diversification allows the institution to have better stability or protection from the impact of an external incident while achieving economies of scale and scope to improve international competitiveness.
A full-service bank usually holds corporate equity by a large proportion and enjoys internal information superiority. However, it often disregards and even damages the interest of outside shareholders. For purposes of monopoly and information superiority, the bank is often less driven for innovation. It is difficult to reconcile internal conflicts between different interest groups in the bank. Therefore, in real-world practice, this model normally requires strict internal control and has demanding requirements of the members in the management at the headquarters (as to business skills, coordination skills, and professional ethics, etc.).
The American Model Quite different from the Continental European model, the management models in the American investment banks were deeply influenced by the separation of activities legacy of the Glass-Steagall Act of 1933. This resulted in the emergence of independent investment banking. After the 1980s, commercial banks marched into investment banking as a result of deregulation. In the competitive landscape of American investment banking, there are independent investment banks, bank holding companies, and small specialized investment banks. Because of the difference in institutional positioning and business activities, management models vary in different investment banks.
The Citigroup Model This model is commonly found in a typical bank holding company, such as Citigroup. A group company controls one or several banks and companies. There are strict legal restrictions (firewalls) between banking and nonbanking subsidiaries. The banking part offers securities and insurance services. For example, Citigroup consists mainly of Citicorp and Citi Holdings. Citicorp is further divided between Regional Consumer Banking and the Institutional Clients Group. Citi Holdings has brokerage, asset management, and local consumer lending divisions.
The Morgan Stanley Model Before reorganizing into a bank holding company in 2008, Morgan Stanley was one of the leading independent investment banks in the United States. Organizationally, Morgan Stanley regroups activities and customers together and sets up divisions to satisfy the needs of customers or business operations. There are divisions for institutional securities, asset management, and global wealth management. The institutional securities department is responsible for investment banking, equity, and fixed-income securities services. The investment and asset management department has a wide range of activities, including conventional mutual fund management, alternative investments, retirement services, as well as financial and estate planning, trust services, securities transfer, and other general activities. The global wealth management department serves high-net-worth clients and earns fees and commissions.
The Model of Specialized Investment Banks In addition to bank holding companies and independent investment banks that provide a full range of investment banking services, within the American financial system there are many boutique investment banks that specialize in some particular activities, have particular expertise, and specifically target niche markets, such as customers and business opportunities in specific industries (see Table 3.1).
Unlike large investment banking corporations, these small investment banks are mostly limited partnerships, which is the conventional organizational model for investment banks. They have super-flat management and rely deeply on incentives and restraints on partners (Zhanyu, 2009).
The Japanese Model The post-World War II Japanese financial model is legislatively a duplicate of the American model. However, the special "main bank" system has resulted from the fact that operational and management models in Japanese financial institutions had been different from American models for quite a long period of time. Corporate cross-shareholding among financial institutions is the main feature of such a system, under which securities firms and commercial banks hold a large number of shares of each other. As a result of this governance arrangement and long-term restrictions on financial business, most Japanese securities firms adopt "activity-driven" organizational and management models, in which a securities firm focuses on the activities, highlights the importance of each activity in
TABLE 3.1 Particular Activities and Expertise of Some Typical American Specialized Investment Banks
the organizational design, and sets up functional departments according to its category of activities.