The dynamics of responsibility in corporate and wholesale finance

The paper examines the traditional function of commercial banks as financial intermediaries between deficit and surplus sectors. Fundamental to this function has been the assumption that banks can intermediate at lower costs than those prevailing with direct financing arrangements, but developments in corporate wholesale financing over the past twenty years or so have significantly undermined this “cost imperative” for large national and international companies . This has resulted in significant disintermediation of commercial banks by large companies and raised the question as to whether this development signals merely another evolutionary phase in modern banking or something far more fundamental. Commercial banks have responded to these changes by becoming more investment bank oriented. Traditional on-balance sheet services for large companies have, therefore, been largely replaced by the off-balance sheet activities of providing investment advice, making placements, the provision of standby facilities, etc. These fundamental changes in business activity have had a marked effect on the commercial banks' principal sources of income and the risks inherent in their business. Just as important, however, is the fact that changes in corporate wholesale banking have far-reaching implications which go far beyond the corporate wholesale market and have fundamentally changed the commercial banks' "business philosophy" and methods of conducting business.