After nearly two years of remarkable calm in the U.S. stock market, February reminded us that volatility never disappears for good. What could this mean for investment banking activity, which has been reaching new records alongside stocks? We find that the aggregate investment banking fee pool actually tracks the equity markets closely. During each of the last two stock market corrections – the 2011 Eurozone crisis and the 2016 oil crash – the IB fee pool fell about 15-20%. However, the various IB product lines had disparate performance during the correction periods. Perhaps unsurprisingly, ECM fees plummeted most, around -40% in both periods – about triple the fall in secondary market prices. Leveraged finance fees also declined about -20%, with origination down even in segments that had nothing to do with the correction drivers. M&A was relatively stable in the correction periods, down only single-digits. Finally, investment grade debt fees actually rose, as yields sunk during “risk-off” periods.
Investment banks can’t control market volatility, but they can mitigate its impact through business line diversification. Banks now weighted toward ECM – particularly cyclical sectors like Healthcare and Technology – can bolster M&A product capabilities to offset volatility. We’ve recently worked with a number of banks to do just that – establish client-driven coverage models underpinned by specific cross-selling opportunities.