What’s The Difference Between Investment Banking and Commercial Banking?

The word bank is a common term that almost all of us are familiar with. It’s either you work in a bank or you save with a bank.

Commercial banking is what comes into our mind when the word “bank” is mentioned, but there is another type of banking which is known as investment banking.

In this article, we will be talking about how investment banking is different from commercial banking and example of such banking institutions.

Which bank is called an investment bank?

Investment banking involves trading securities, facilitating the issuance of securities, advising on mergers and acquisitions, and providing other services to corporations. ⁣ It primarily focuses on providing financial services to corporations, governments, and other institutions.

Commercial banks on the other hand focus on providing banking services to individuals and institutions, such as taking deposits, withdrawals, and giving out loans.

In the United States, investment banks are regulated by the Securities and Exchange Commission (SEC), while commercial banks are regulated by the Central Bank (Federal Reserve). Both types of banks are subject to stringent regulations designed to protect consumers and prevent financial crises.

Some well-known investment banks include Goldman Sachs, JPMorgan Chase, and Morgan Stanley.

Can a bank be both commercial and investment?

Few banks are both commercial and investment banks. These types of banks, known as universal banks, offer a range of financial services to both individual and institutional clients. However in the past, during 2008 there was a financial crisis, and many banks merged. It is been observed that combined-function banks failed drastically

For example, a universal bank may offer checking and savings accounts, loans, and credit cards to individuals, as well as provide services such as underwriting, M&A advice, and trading to corporations and other institutions. Universal banks often have both a commercial banking division and an investment banking division, each serving its own set of clients and offering a specific set of services.

Examples of universal banks include Citigroup and Bank of America.

What is unique about investment banking?

Investment banks have their unique way of operating, which makes them different from commercial banks. As mentioned earlier, they deal with governments, corporations, and other institutions.

They help their clients raise capital by issuing securities, providing advice on mergers and acquisitions, and underwriting new debt and equity offerings. They also often have trading desks that buy and sell securities on behalf of their clients. Another unique aspect of investment banking is that it is typically focused on generating revenue through fees and commissions, rather than through the interest earned on loans. This means that investment banks often have a more complex business model and a higher level of risk than commercial banks.

1. How investment banks deal with governments

They work with governments to help them raise capital by issuing securities such as bonds. This may involve underwriting the bonds, which means that the investment bank purchases the bonds from the government and then sells them to investors.

Investment banks may also provide advice to governments on issues such as public finance, fiscal policy, and debt management.

Additionally, investment banks may help governments with mergers and acquisitions, such as when a government wants to sell a state-owned enterprise or acquire another company.

Overall, investment banks play a key role in helping governments raise the funds they need to finance their operations and achieve their policy objectives.

2. How investment banks deal with corporations

Investment banks play a critical role in helping corporations raise capital by issuing securities such as stocks and bonds. They may also provide advice to corporations on issues such as mergers and acquisitions, corporate finance, and risk management.

For example, if a corporation wants to acquire another company, an investment bank may help it evaluate the potential acquisition, negotiate the terms of the deal, and raise the necessary funds to complete the transaction. Investment banks may also help corporations issue new debt or equity securities, such as by underwriting an initial public offering (IPO) of stocks.

In this case, the investment bank would purchase the securities from the corporation and then sell them to investors. Investment banks may also have trading desks that buy and sell securities on behalf of corporations.

In a nutshell, investment banks are an important source of financial services for corporations.

What are the three types of investment banks?

Investment banks have different types depending on the size and service they offer. These are bulge bracket banks, middle-market banks, and boutique banks.

1. Bulge bracket banks

Bulge-bracket investment banks are the largest and most well-known investment banks. They typically have a global presence and offer a wide range of services to corporations, governments, and other institutions.

These banks are known for their size, expertise, and ability to handle complex financial transactions. They are often involved in the biggest and most high-profile deals in the financial markets, such as large initial public offerings (IPOs) and mergers and acquisitions (M&A) involving major corporations. Bulge-bracket investment banks are known for their deep pools of capital and their ability to provide a wide range of financial services to their clients.

Examples include Bank of America Merrill Lynch, Goldman Sachs, Barclays Capital, Credit Suisse, Deutsche Bank, JPMorgan Chase, Citigroup, Morgan Stanley, and UBS

2. Middle-market investment banks

Middle-market investment banks are a type of investment bank that focuses on serving smaller and mid-sized companies. They may have a more regional or local focus and may specialize in a particular industry or type of financial service. Middle-market investment banks may offer their clients services such as underwriting, M&A advice, and capital raising. Unlike bulge-bracket investment banks, which tend to focus on the biggest and most high-profile deals, middle-market investment banks often work with smaller companies. They may have a more personalized approach to working with clients. Examples of middle-market investment banks include Moelis & Company, Lincoln International, and Houlihan Lokey.

3. Boutique bank

Boutique investment banks are smaller, specialized investment banks that often focus on a particular industry or type of financial service. They may offer expertise in a specific area, such as healthcare or technology, and may have a more personalized approach to working with clients. Boutique investment banks may provide services such as M&A advice, capital raising, and strategic consulting to their clients. They may also have a more focused and targeted approach to the financial markets and may specialize in serving a particular segment of the market or working on smaller deals. Examples of boutique investment banks include Evercore, Greenhill & Co., and Lazard.

The type of investment bank a client works with will depend on their specific needs and goals.

Conclusion

At this point, we have seen the difference between investment banking and commercial banking. Commercial banks offer deposits, loans, and other financial services to consumers and businesses. Whereas, investment banks offer advice on products including stocks, bonds, and derivatives to institutional investors, governments as well as private investors.