More Stringent Laws and Restrictions
After considering the Wall Street crash and also the credit crisis in America, it is very much possible how the regulators and politicians will impose stringent laws and limitations on investment banks. The laws and restrictions will be produced with an intention to curtail the aggressive market strategies of those banks, as well as to come up with a much better risk management scheme.
Claw-back Provisions
In order to make the volatile market of investment banking more secured from crashes brought on by imprudent individual traders or groups, banks may tighten in the claw-back provisions. This provision requires those whose trades trigger subsequent losses, to pay back all or part of the bonuses. However, this might result in the transition associated with traders from big names to less well-known boutiques, to prevent scrutiny.
Emphasis on Equity Derivatives and Currency trading
An equity derivative is definitely an instrument used by investors to hedge the risks related to taking a position in stocks. It consists of underlying assets depending on equity securities and limits the losses incurred by whether short or long position in a company's shares. To be able to derive more benefits, investment banks will be emphasizing more on forex trading, interest-rate products, equity derivatives and corporate restructuring.
Fewer big banks and much more small boutiques
As the giant investment banks faced large losses, which in turn affected the government and traders, in future there will be fewer big banks and much more boutiques. This will force the big shot investment banks to become careful about their position, as they will face rigid competition from small firms. In any case, the charm of investment banks is a thing that will not decrease in near future.
Lesser Dependence upon Short-Term Funding
Considering the negative impact of the intense strategies of investment banks, in future, there might be lesser reliance on short-term funding and high leverage. As the investment banking institutions are largely financed with short-term funding, a massive asset/liability mismatch is done which is difficult to manage. It is also probable that more investment banks is going to be pushed into the arms of banking acquirers with big and stable deposit bases. This will provide solution to the investment banks which can be financed for the good times, not the bad types.
Some people think that investment banks have already hit the underside of a swimming pool, that too head-on. However, there's a possibility that this may be a case of points getting worse before they improve. After the improvement associated with economy, tougher regulations and stringent laws will make the little firms more influential and bring them on par using their giant counterparts. Then it will all depend on the investors and their power to break into finance and investment banking, in the not too distant future.