Custody bank oligopoly
The rise in equity fund buyouts and hedge fund investing, along with their increasingly global reach, is also leading to a major rise in the business of so-called "custody banking," Custody banks are the companies that hold and process the money that changes hands whenever a deal is being made. They also lubricate dealmaking with such services as, foreign exchange, fund accounting, and short-term security loans. That's according to a Wall Street Journal article ("Outside Audit: Why Custody Banks Now Have a Global Glow," 11/2/06).
The more complex the deals in terms of countries and asset involved, the more services these banking operations are called on perform, and the higher the margins. Only dedicated specialists can now understand the variations in accounting standards and financial regulations needed to make the transactions, the article notes.
The services are provided by four big American-based international financial powerhouses. The business is unsexy but complements their involvement in more glamorous investment advising and funding businesses.
The big four are:
- J.P. Morgan Chase, the leader by far with, 2.48 billion in revenue in the first nine months of 2006
- Citigroup
- State Street Bank
- Bank of New York
Together, the article reports, the top four banks held $46.1 trillion in assets under custody as of Sept. 30. The next six largest custody banks (both American and overseas) together hold half that amount.
These companies have found a profitable and quickly growing niche. One that is directly proportional to the number of international megadeals. Few institutions could even begin to handles the trillions these companies hold. It's not surprising that the leading two players are also of the largest commercial and investment banks in the world. And the global reach is ever more important. It's another case of only the big servicing the big.
