The draft for a structural reform of the largest banks in Europe could go as far as to insulate their trading business. This draft bears the risk of not winning the support of the supporters of the “Banque universelle” model.
Such topic introduces an interesting question about what differentiates the investment banking business from the lending business.
A visit of a trading room would have the advantage to save many explanations on that matter.
If a slightly technical layer were to be added to this observation, why not define the investment bank with the very etymology of the word “ bank”: a place to buy and sell?
The act of mixing investment with credit may have consequences.
Take the example of a bank that invests €100 in a book of listed securities that it chooses to fund up to 20€ with its own financial means and for 80€ with “margin loans”.
Such margins loans are generally granted with an acceleration covenant so that the amount of the credit do not exceed 80% of the market value of the listed securities This may lead to some kind of “descent into hell”.
Assuming a 5% loss in value of the securities, the lender would be entitled to ask for a prepayment of €4 so that the 80% mark be not exceeded. The investor would therefore have to sell for €4 of securities, but in so doing, the amount of its securities would be down to 91€ and the lender would again require a prepayment of €3.2. And the investor will have no choice but to sell additional securities to the amount of €3.2 and, for the same reason than above, this will not suffice…
The relevant suggestion may be that one should refrain from making “investments for one’s own account ” unless they be funded by equity.
Dominique F. Pasquier