Investment firm Morgan Stanley on Monday became the last of the major banks to report earnings, and it was more good news for investment banking. The firm beat forecasts. Net revenue was up 10.3 percent.
Last week, other major U.S. banks also reported mostly good news and, in almost all cases, profits were boosted by the firms’ investment banking businesses — the very same businesses that came under increased scrutiny and regulation after the 2008 financial crisis, and that were the subject of tighter regulations.
“After the crisis, a false narrative developed” about investment banking, says Charles Calomiris of Columbia Business School. Banks that engage is investment activity are not necessarily taking big risks with money. “There’s a wide variety of activities that actually have very little risk, that are fee for service, that actually add a lot to the stability of the banking system,” Calomiris says.
Those services include facilitating stock trades, advising corporations and wealth management. Fees for such services are playing a big role in bank profits now, and the timing has to do with soaring stock prices, according to Lawrence White, an economics professor at New York University.
“The stock market has been doing well lately, and the volume, the pace of mergers and acquisitions has been increasing,” which in turn increases banks’ revenues from fees, says White.
But, White cautions, big banks are under increased regulatory scrutiny because there is still risk involved in their dual practices of investment banking and traditional banking, especially if the current good times come to an end and banks looks for riskier ways to bring in profits.
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