debt-to-equity ratio for investment and commercial banks

[jonathans]

why do commercial banks typically have less leverage as they have a greater
intermediary function between savers and borrowers
investment banks rely on wholesale funding and run higher leverage
balance sheets??

This is from april 2010 question 2 part iii c.


Thanks!

 

[Colin McKee]

I think what this refers to is the fact that commercial banks still perform an "old fashioned" banking function whereby they get most of their deposits from savers and retail customers, and then lend that out in the form of mortgages, loans, overdrafts etc. The leverage may be restricted by the ability to raise money from savers. They do not resort to the interbank markets as quickly as investment banks. Investment banks on the other hand dont hang around waiting for savers to deposit. They simply borrow from the interbank markets as soon as they have a profitable project or loan idea. This has given a much greater access to debt finance in the past, and therefore investment banks have run higher leverage ratios. I must admit, it was a hard part to the question, as it may not have been common knowledge.

 

[jonathans]

5 October 2011 question 1 part 6 - is this an example of what you mentioned above? - "They simply borrow from the interbank markets as soon as they have a profitable project or loan idea. This has given a much greater access to debt finance in the past, and therefore investment banks have run higher leverage ratios."
Attached the question.

 

[Colin McKee]

I suppose so - the bank in question is funding a proposed deal using money market funding, which is there in abundance. If they had to rely on customer deposits it might not have undertaken the deal as it would chew up scarce resources.