Investment Banks
Overview
An investment bank is a financial institution that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities. This role is in contrast to a retail bank, which typically offers deposit and loan services to individuals and small businesses.
Investment banks may also provide other services, such as mergers and acquisitions advisory services, derivatives trading, foreign exchange, commodity trading, and equity securities trading. They also provide guidance to issuers regarding the issue and placement of stock, such as with an IPO.
History
The history of investment banking traces back to the early periods of the United States. The first investment bank in the US was The Bank of the United States, established in 1791. The industry has evolved significantly since then, with the major changes and developments coming in the 20th century.
Functions
Investment banks perform several functions. They provide financial advisory services, underwrite debt and equity offerings, act as intermediaries between an issuer of securities and the investing public, facilitate mergers and other corporate reorganizations, and act as brokers and financial advisors for institutional clients.
Financial Advisory
Investment banks offer strategic advice on a variety of financial matters. This can include advice on mergers and acquisitions, strategic alliances, asset sales, and corporate restructuring.
Underwriting
Underwriting is the process of raising money by either debt or equity. In this role, the investment bank will guarantee payment in case of a failure by the issuer in return for a fee.
Mergers and Acquisitions
Investment banks advise companies on mergers and acquisitions. This can involve identifying potential acquisition targets, providing valuation analyses, and negotiating with bidders.
Sales and Trading and Equity Research
Investment banks have sales and trading desks, which trade securities, and their equity research teams publish research reports on companies and sectors.
Structure of Investment Banks
Investment banks are typically structured into 'front office,' 'middle office,' and 'back office.' Each sector is vital to the effective functioning of an investment bank.
Front Office
The front office includes investment banking, sales and trading, and research.
Middle Office
The middle office includes risk management and treasury.
Back Office
The back office includes operations, technology, and human resources.
Regulation
Investment banks are heavily regulated due to their importance in the financial system. Regulations focus on the risk level banks are allowed to take and the ways they can finance operations.
Criticism
Investment banks have been criticized for a variety of reasons, including perceived conflicts of interest, overly large pay packages, and the propagation of boom and bust cycles.