CHAPTER 3How the Global Financial Crisis Transformed the Industry

Christian Edelmann and Pete Clarke

Capital markets have changed fundamentally following the global financial crisis. In this chapter we discuss the transition from the pre‐crisis period, when investment banks enjoyed record profit levels, to the world we observe today. We discuss in detail the main measures that the regulators introduced following the crisis and their impact on investment banking business models. We conclude with a discussion on the effects of these changes on the functioning of capital markets.

THE SITUATION PRIOR TO THE GLOBAL FINANCIAL CRISIS

Sales and trading in fixed income and equity instruments and primary market investment banking activities enjoyed a period of tremendous growth from 2000 to 2007. Industry revenues almost doubled to $300bn over this period. This compares to global GDP, which rose 60% in nominal terms over the same period. Investment banks posted record profits and advertised high targets for shareholder returns on equity.

This strong industry growth had several drivers. Benign economic conditions and strong economic growth in most regions globally accelerated asset accumulation and drove up investor appetite for risk assets. Liberalization of banking structures and of national financial systems meant that banks could benefit from a wider array of funding sources and compete in a wider range of markets, leading many to acquire smaller rivals along the way. Financial ...

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