Collateral and rating

A good overview of the effect of rating downgrade and increased risk aversion on the profitability of investment banks and, inevitably, the liquidity of financial markets.

M Stanley reassesses downgrade impact - FT.com: "The additional collateral needed could reduce Morgan Stanley’s fixed income derivatives revenues by almost a third, analysts at AllianceBernstein estimated in a recent note. In addition to having to stump up extra collateral to its trading partners, Morgan Stanley could also face a higher cost of funding, the analysts said."

This also gives some indication of the importance of the economies of scale in investment banking.