:''I-banking redirects here. For internet banking, see
online banking.''
'Investment banks' help companies and governments and their agencies to raise money by issuing and selling
securities in the
primary market. They assist public and private
corporations in raising funds in the
capital markets (both
equity and
debt), as well as in providing strategic advisory services for
mergers,
acquisitions and other types of financial transactions.
Investment banks also act as intermediaries in trading for clients. Investment banks differ from
commercial banks, which take deposits and make commercial and retail loans. In recent years, however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services to becoming a one-stop service provider. In the US, the
Glass-Steagall Act, initially created in the wake of the
Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities; Glass-Steagall was repealed by the
Gramm-Leach-Bliley Act in
1999. Investment banks may also differ from
brokerages, which in general assist in the purchase and sale of
stocks, bonds, and mutual funds in the
secondary market. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world.
In the strictest definition , investment banking is the raising of funds, both in
debt and
equity, and the division handling this in an investment bank is often called the "Investment Banking Division" (IBD). However, only a few small firms provide only this service. Almost all investment banks are heavily involved in providing additional financial services for clients, such as the trading of
derivatives,
fixed income,
foreign exchange,
commodity, and
equity securities. It is therefore acceptable to refer to both the "Investment Banking Division" and other '
front office' divisions such as "Fixed Income" as part of "investment banking," and any employee involved in either side as an "investment banker." Furthermore, one who engages in these activities in-house at a non-investment bank is also considered an investment banker.
More commonly used today to characterize what was traditionally termed "investment banking" is ''"
sell side."'' This is trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e.
underwriting, research, etc.).
The ''"
buy side"'' constitutes the
pension funds,
mutual funds,
hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment. Many firms have both buy and sell side components.
Organizational structure of an investment bank
The main activities and units
The primary function of an investment bank is buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through
proprietary trading, done by a special set of traders who do not interface with clients and through ''Principal Risk'', risk undertaken by a trader after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet.
An investment bank is split into the so-called '
Front Office', '
Middle Office' and '
Back Office.' The individual activities are described below:
'
Front Office'
★ 'Investment Banking' is the traditional aspect of investment banks which involves helping customers raise
funds in the
Capital Markets and advising on
mergers and
acquisitions. Investment banking may involve
subscribing investors to a
security issuance, coordinating with
bidders, or negotiating with a
merger target. Other terms for the Investment Banking Division include
Mergers & Acquisitions (M&A) and
Corporate Finance (often pronounced "corpfin").
★ '
Investment management' is the professional management of various securities (
shares,
bonds, etc.) and other assets (e.g.
real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (
insurance companies,
pension funds,
corporations etc.) or
private investors (both directly via investment contracts and more commonly via
collective investment schemes eg.
mutual funds) .
★ '
Financial Markets' is split into four key divisions:
Sales,
Trading,
Research and Structuring.
★
★ '
Sales and Trading' is often the most profitable area of an investment bank, responsible for the majority of revenue of most investment banks. In the process of
market making, traders will buy and sell financial products with the goal of making an
incremental amount of money on each trade. ''Sales'' is the term for the investment banks sales force, whose primary job is to call on
institutional and
high-net-worth investors to suggest trading ideas (on
caveat emptor basis) and take orders.
Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.
★
★ '
Research' is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank.
★
★ 'Structuring' has been a relatively recent division as
derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities.
'
Middle Office'
★ '
Risk Management' involves analyzing the
market and
credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "
operational risk" and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.'
'
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