Q1.
a). Investment banks generally offer services in the areas of: 1) making a market in securities, 2) underwriting securities, and 3) assisting in mergers and acquisitions, and 4) asset management. Most of these are fee-based services, which are not subject to credit risk. Commercial banks have become increasingly interested in the last three because of the possibility of earning fee income. Banks that underwrite securities help a firm or government unit place a debt or equity issue with the investing public. They do so either on a best efforts basis for a fee, or actually buy the securities from the original issuer before selling them to investors. When assisting in mergers and acquisitions, banks charge substantial fees for their efforts without taking much risk. Banks that manage assets for customers charge a fee for the service.
b).
Banks are losing market share due to increased competition. Many entities now make loans and accept deposits which represent the core bank products. Many of these competitors target large firms with the largest loans and deposits. Many banks have similarly decided not to take as much credit risk. As such, they originate loans then securitize them. Securitization effectively moves the loans off bank balance sheets. Market share data that reflect assets will understate the role of banks. Banks would have to hold more assets on balance sheet and have access to greater sources of funding for the market share data to increase. One should examine revenue for an alternative view. Clearly, mutual funds and pension plans are increasing their holdings of financial assets because that is the very nature of their businesses. They collect funds - many customers view pension contributions as a critical savings vehicle and mutual funds offer attractive alternatives to bank deposits – such that the data reflect their growth over time.