Investment Banks and Old Partnerships

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 |  Includes: KBE, XLF
by: Paul V. Azzopardi

In the old days, there were tightly controlled banks which were allowed to take people's deposits and whose operations where limited to particular geographical areas. They were allowed to lend for the short-term.

Then there were investment banks which were allowed to do many other things but they were general partnerships - all the partners had most of their wealth tied up in the bank and at risk, withdrawals were frowned upon, and all partners worked out of the Partners' Room, from one big desk. This last Dicken-ish arrangement ensured that partners could keep an eye on one another and any partner who took too much risk on behalf of the firm was instantly discovered.

Investment banks were eventually allowed to take on limited liability and go public, using OPM.

I was wondering whether a researcher would be able to highlight the main changes in behavior between partnership and corporate investment banks.

To what extent did firms' capital structures influence the degree of risk which investment banks took on?

How were profits shared, before and after?

Did the change in investment banks' capitialisation structure increase or decrease the market's systemic risk?