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Investment and marketing: answering the questions - Essay Example

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Investment and marketing: answering the questions

Many large clients seek the services of an investment bank precisely for this reason, as the collective knowledge base of the financial sales experts in the group should allow the client to gain a preferential entry and exit point for market trades. However, financial sales staff can also abuse this inside knowledge, as for example, Goldman Sachs did in creating the Abacus tranche of mortgage bonds for hedge fund trader John Paulson which were designed to fail, but sold to pension funds, private investors, municipalities, and other investment banks as legitimate long-term investments while simultaneously being shorted by Paulson’s hedge fund. ...
The numerous recent stories about “rogue traders” at UBS, Societe Generale, and Barings Banks, as well as the collapse of Lehman Brothers, show how leveraged investments in stocks, bonds, and derivatives can threaten the viability, stability, and core deposits of clients using these banks for traditional financial services. Therefore, regulators need to be able to monitor the capital reserves of bank and also the relationship of these reserves to leveraged market investments in other sectors that can go negative and lead the entire bank into insolvency. This threat also exists when banks hold their reserve capital in seemingly risk free bonds, such as those issued by national governments and municipalities. While these may appear to be the ultimate safe, long-term investments for holding capital reserves in the banking sector, the example of the potential Greek sovereign default and the poor state of municipal budgets across Europe and America show how even these type of deals must be watched by regulators in order to insure that the banks remain adequately capitalized as required by the Basel Accords and other international regulatory statutes. 1b. Explain and evaluate how policymakers in the UK are addressing the three regulatory challenges you raised in 1a. (8 marks) The regulators in the UK are addressing these concerns with investment banks by re-evaluating and updating the Basel II accords that establish “Tier 1” capital reserve regulations for the industry. One consequence of this is limiting the ability of the banks to over-leverage into investments that could put the “core” financial services such as savings and loan accounts at risk. (Shipman, 2011, p. 22) “Under the Basel III rules, banks will have to raise their ratio of ...Show more

Summary

Questions Part A (50 per cent of the marks) (1000 words) 1a. Using Extract 1 by Linda Whitney and the study materials, briefly outline three regulatory challenges that might arise from the employment of sales staff in the financial services industry. (12 marks) One of the major concerns for independent regulation of the financial services industry relates to the structure of large investment banks, where multiple divisions within the same company structure may have interests with clients that compete or conflict with each other…
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