Over the past few decades, the financial sector has changed and developed a lot. This, of course, includes the banks. For many decades, banks were institutions working on accepting deposits, making loans, and deal with transactions between their clients. However, this has changed a lot, specifically after the updated Glass-Steagall Act in 1999.
As the act was passed, it opened a lot of doors and opportunities for banks in the United States. Thanks to the act, banks transferred from simple financial intermediaries, the act helped the banks, securities firms, and insurance companies to affiliate with investment bankers.
Thanks to this, banks were allowed to use the balance that they had to trade in numerous markets, including capital and money market instruments. Now that the banks had become dealers, it had ended up creating a lot of changes for the whole financial industry.
Thanks to the 1999 Act, investment banks are capable of covering activities requiring considerably less capital. But, this is not the only change. The profit for banks can also be the quoting difference between the bid and ask prices of securities. This means that now, these banks can profit not only from fees but from actual assets.
In fact, modern banks are also capable of offering traders similar services as financial brokers do. Although this transformation has created a lot of opportunities for the investment banks, making them capable of carrying out similar activities to brokers, there are still some serious differences between brokers and banks.
One of the main differences is that the brokers are capable of doing their job in a more efficient way. The main reason for this is that brokers are only focused on the job that they do, while investment banks have to work in many different fields.
Because of this, in most cases, brokers are more user-oriented. There are numerous services that these brokers offer that investment banks do not. One great example can be bonuses and promotions, offered by many brokers around the world. In the trading markets, the majority of bonus promotions Forex brokers offer are tailored to the clientele of the broker. On the other hand, such promotions are rarely offered by investment banks.
While this is not the main determinant of the usefulness of a broker or investment bank, it shows that the difference between brokers and investment banks is still vast. However, the further development of banks in the brokerage industry might not be finished.
Covid-19 and the banking sector
The Covid-19 pandemic has changed many things around us. Although the majority of its impact was negative, there were some things that were positively affected by the pandemic. One of the things that the Covid-19 affected was the existing trend in the banking industry. The trend was very much accelerated.
As a result, the power was slowly shifted from the investment banks to the market-making operations. Over the past few months, it can be seen that the banks are expanding their brokerage role even more, as a result, earning more fees and more profits. As for the secondary market, banks are starting to experience transformation as well.
This is happening by banks transforming their businesses away from market-making activities. Rather, they are getting closer to fee-based brokerages. For example, cash management, credit cards, retail savings accounts, and many others. By doing so, banks are capable of earning more by charging fees for all the different services.
There are some actual reasons why the banks have worked so hard on this transformation. The main reason is that the profits made by the banks had declined a lot over the past few years, mainly because of the declining credit costs and other changes. Now, by adopting these new services, they have improved the fee-based business, which has proved to be very important for banks.
Banks acting as brokers
There are several things that change when banks start to act as brokers. First of all, the income of the bank becomes dependant on fees, for example, monthly account fees. As for the actual process of the work, it is very much the same as it is for actual brokerages. The investment bank brokers put together potential buyers and sellers from their sheet, very much like real estate brokers do, for example. This way, the broker helps buyers and sellers to match.
The Glass-Steagall Act is one of the most important acts of American business. For as much as seven decades, it has worked as a definer of the banking sector saying that commercial banks can lend money, extend credits, open accounts, and so on.
On the other hand, the act defined investment banks to have the ability to underwrite securities, advise on investments, and provide brokerage services. While the services of these two were very much differentiated by the act, its repeal in 1999 changed everything. Thanks to this act, today, commercials banks, investment banks, insurance companies, and brokerages are able to offer each other’s services to their clients.
This is changing a lot of the things in the market. For starters, services are becoming more competitive. Now that companies in different sectors have the ability to offer similar services, the competition is higher. Also, investors have the opportunity to choose between the best services.
Where the transformation goes after this is still up to a debate. As the whole sector continues to develop and transform, many expect further deregulation of the financial services industry.
