Are Domestic Banking Policies Killing Investment Banking?
External macroeconomic factors are beyond the control of investors and investment bankers, but local factors and domestic policies of several countries, especially emerging Asian markets, are hurting small and medium-sized investment banks and heavily affecting SMEs’ fundraising capabilities.
Contrary to popular belief, the policy framework devised in the aftermath of the 2008-2009 global economic meltdown is not the main reason for this restricted growth of investment banks. In reality, strict regulations monitoring investment banking activities have provided protection to investors and also stopped the questionable strategies of certain financial institutions that might otherwise have caused another economic downturn.
2014: The tipping point
Looking back, the investment banking sector did very well from 2010 until the end of 2013, riding the wave of strong currencies and commodities markets. However, since the beginning of 2014, the industry has been in the red. That year, the commodity cycle went downhill, China slowed down, global oil prices collapsed, and the demand for iron ore and coal declined, collectively crippling the growth of investment banking.
To make matters worse, many governments came up with their own set of rules, inflicting near-fatal wounds. In India, for example, the market was positive until Q3 2016, when it was hit by the demonetization drive. As of today, recovery is not yet in sight.
Moreover, as a cherry on an already rotten cake, large sums of money remain parked in banks because a new regulation restricts Indian investors’ annual foreign investments to $250,000. If an investor seeks to invest more than this, the amount has to be approved by India’s central bank, the Reserve Bank of India (RBI).
India’s RBI has initiated restrictions on outgoing investments to maintain healthy forex reserves; the same is true for Pakistan and other neighboring countries. Since most of these aim to keep healthy US dollar reserves, they have come up with policies to regulate investment outflows, adversely affecting the investment banking market.
Investors’ confidence has also been shaken by heavy taxation, new arbitrary monetary and investment policies, and low performance of previously invested assets, especially commodities.
Another factor that has affected investment banking is the poor performance of the international real estate market. Across the world, whether in the US, the UK, Europe, India, Middle East, China or the Far East, real estate markets have plummeted by as much as 30 percent.
The local effect
In terms of wider banking regulations, the basic skeleton is provided by global bodies like the World Bank and WTO, which adapt quickly to market changes. But the story is very different with local regulations. Local policies lack uniformity and are more susceptible to local factors, such as economic performance or fund-management issues of the central banking system, where restrictions are enforced arbitrarily.
SMEs shutting shop
In our experience, we have seen legitimate banking products being taken off the shelf willy-nilly in some environments, making it hard for investment bankers to operate. Meanwhile, emerging-market SMEs find the cost of raising capital in developed markets exceeds even their working capital, thus making no financial sense. Therefore, some small players had to shut shop. Numerous SMEs also closed down when some legitimate funding products were phased out in certain markets – something that will negatively affect the economy.
Lastly, the investment banking industry has a strong foreign investment component. In places like Dubai, the pathway is smooth and open, but in emerging economies such as India, Pakistan, Bangladesh or Thailand, investment laws exist for each investment vehicle.
In conclusion, while regulations have helped stabilize the investment banking industry and raised investors’ confidence, local policies, led by local factors, currently tend to create hurdles more frequently than the industry can digest, overcome and, eventually, grow.