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Brawn takes on brains in the battle for the corporates

Universal banks are making great strides in winning business that used to be the preserve of the investment banks. In part a function of the weak state of the financial markets, it may also be a secular trend. A big balance sheet is a mighty weapon and investment banks will be particularly pressed if they are forced to indulge in competitive lending to retain customers. Yet the investment banks’ prospects have been blighted as much by their own mistakes, such as ineptly timed waves of sackings of key personnel after losses, as by irresistible new forces.

This is supposed to be the year of the big balance sheet: the year when leadership in wholesale financial and capital markets business passes from the pure-bred US investment banks to a mix of US and European hybrid, universal banks. The universal banks can supposedly offer not just all the investment-banking services, but also the commercial lending, foreign exchange, custody and cash management services that clients need.

Throughout the past 10 years the investment banks operated in a league ahead of the large commercial banks. Now they're being trampled underfoot, and may be especially vulnerable in the new climate. The only way that the pure investment banks - Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley - could possibly survive, the argument runs, is by joining forces with commercial banks.

Yet maybe the argument has been overstated in what has been a rotten year for the financial services industry. Banks, after all, have had to face up to falling equity and M&A volumes, general economic gloom, worries about job losses and now, far worse than any of these, the destruction of much of lower Manhattan in a murderous terrorist attack that has left many financial services firms struggling to function in back-up offices while survivors mourn lost colleagues.

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