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Sharing the below with you in case useful ahead of IB interview season.
1. Sluggish Deal Activity (M&A and Capital Markets Haven’t Fully Recovered)
What’s happening:
After the record-breaking years of 2020–2021 — when cheap borrowing and high valuations drove a flood of IPOs, SPACs and mergers — activity slumped in 2022–2024. Interest-rate hikes, inflation, and geopolitical tension (Ukraine, the Middle East, U.S.–China trade friction) made CEOs more cautious. By late 2025, deal flow has improved but remains well below pre-boom levels.
Why it matters:
Investment banks rely on transaction fees from advising on deals and raising capital. When fewer companies are buying, selling or issuing shares and bonds, revenues drop sharply. Fixed costs (salaries, technology, regulation) stay high, so profits get squeezed.
In plain terms:
Banks earn money when companies make big moves. But when the global economy feels unpredictable, executives prefer to wait — meaning fewer deals and smaller pay-days for bankers.
2. High Interest Rates and a Difficult Financing Environment
What’s happening:
Central banks have kept interest rates elevated to contain inflation. Borrowing is expensive, investors demand higher returns, and credit markets are more selective.
Why it matters:
Deal financing: Leveraged buyouts and debt-funded M&A become costlier and harder to justify.
Corporate clients: Companies face higher refinancing costs and may postpone expansion or debt issuance.
Market volatility: Bond and FX markets swing sharply whenever policy expectations shift, making trading risky.
In plain terms:
If you need to borrow at 7% instead of 2%, you think twice before doing a deal. That hesitation ripples through the whole investment-banking pipeline.
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3. Competition from Private Capital (PE, Private Credit, Sovereign Funds)
What’s happening:
Private-equity and private-credit giants now control trillions of dollars and often bypass banks entirely. They can underwrite debt, provide equity, or buy companies without using public markets.
Why it matters:
These funds act like banks — lending directly to companies and taking advisory roles themselves.
They lure senior bankers with higher pay and flexible mandates.
As clients go “direct to capital,” banks lose both fee income and influence.
In plain terms:
Twenty years ago, a company wanting to raise $500 million had to go through an investment bank. Today, a private fund might just write the cheque itself — cutting the bank out of the middle.
4. Cost Pressure, Restructuring and Automation
What’s happening:
Shrinking revenue and rising costs mean banks are obsessed with efficiency. Thousands of roles have been cut in advisory, trading, and support teams. At the same time, firms are investing heavily in AI, data automation, and digital platforms to streamline modelling, compliance, and client reporting.
Why it matters:
Short-term: It protects profit margins.
Long-term: It changes the skill set required — fewer junior “spreadsheet” roles, more data-driven and client-facing work.
Cultural risk: Morale suffers when cuts hit; training pipelines weaken.
In plain terms:
Banks are trying to do more work with fewer people and smarter software. It keeps costs down but makes the job faster-paced, less personal, and sometimes more stressful.
5. Heavy Regulation and Reputational Scrutiny
What’s happening:
Post-2008 regulations never stopped tightening — and new ones keep coming: ESG reporting, AI governance, capital-adequacy rules (Basel III / IV), and conduct standards. On top of that, public and political scrutiny remains intense after years of scandals and layoffs.
Why it matters:
Compliance costs billions each year — lawyers, systems, audits.
Regulations can delay deals or restrict certain trading activities.
One reputational slip (e.g., greenwashing, data misuse, unethical conduct) can trigger fines and erode client trust instantly.
In plain terms:
Banks are operating under a microscope. They spend huge amounts of time proving they’re playing by the rules — and one mistake can wipe out years of good work.
Summary Takeaway
If you were explaining the industry’s landscape today, you could say:
“Investment banks are facing slower deal flow, expensive funding, growing competition from private capital, pressure to cut costs through automation, and constant regulatory oversight. The ones that win will be those that adapt — combining technology and discipline with deep client relationships.”
Good luck with apps and prep! Catch you soon!
Afzal
Founder, Finance Fast Track
Author, Breaking Into Banking