How Concentrated Was Investment Banking?

In the fall of 2008 a considerable amount of ink was spilt arguing that we needed to save the then big-five investment banks, or else our financial markets would come to a halt.  One could easily get the impression from the debate that these five firms were the entire industry.  At the time these five included Goldman Sachs, JP Morgan, Merrill Lynch, Lehman and Bear Stearns.  Before we go around rescuing companies, it would seem reasonable to ask if the rest of the industry could pick up their capacity.  Of course, if there is no “rest of the industry” then that question is easily answered.

So what exactly did the investment banking industry look like in 2008?  The best source of public information we have is the 2007 Economic Census, conducted by the U..S. Census Bureau.  According to the Economic Census, there were a little over 3000 individual investment banking firms.  The vast majority had only one office with often no employees (just a few partners).  Only about 400 firms had more than one office location (or establishment, as the Census calls them).  Only about 20 firms had more than 10 offices and really could be considered significant players in the industry.

Another way of measuring the importance of the largest firms is to look at market share.  The four largest firms were just over half the industry,  in terms of investment banking sales/receipts.    Of course that also means that the rest of industry was also half.  The top 8 firms held about three-fourths of the market.  Top 20 firms gets you to 90 percent of the market.

So what does this tell us?  Yes, the industry had a high level of concentration (even higher now), but it also seem likely that no one company was large enough to bring down the industry.  There were, and still are, a handful of mid-sized players that could have absorb the market share of either a Bear or Lehman, or at least some part of their business.  Either way, the lesson we should learn is that policy should be encouraging more competition and depth in the investment banking field, so that the market is not left largely in the hands of a few companies.