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Investment Banks

Date Added: December 06, 2010 03:12:06 PM
An investment bank is defined as any financial institution that aids individuals, small business, corporations, and governments in generating capital mediating investments and the purchasing of securities on the client's behalf. Investment banks are also known for assisting clients during acquisitions and mergers, as well as providing ancillary services like derivative trading, foreign exchange, fixed income instruments, market making, equity securities, and commodities. Unlike typical commercial financial institutions, investment banks do not take deposits, and usually don't offer personal loans.

Investment Banking Sectors

There are two sides to investment banking operations – the 'buy' side and the 'sell' side. The sell side involves trading securities for funds or other securities (i.e. market making and facilitating transactions), and promoting securities (i.e. research and underwriting). The 'buy' side involves dealing with mutual funds, pension funds, hedge funds, and public investments. Many investment banking firms have both sell and buy side components to provide more extensive services to their clients and maximize their profits. The operations of the investment banking industry are also segmented into two sectors – the private and public sector.

Investment Banking Activities

The operations of an investment banking firm are delegated amongst the front office, back office, and middle office. The exact activities of an investment bank will vary depending on whether the bank is a full-service bank or a small brokerage type bank. The front office of an investment bank deals with basic investment banking, sales and trading, research, and possibly investment management, global transaction banking, merchant banking, and commercial banking. The middle office is involved with risk management, financial control, corporate treasury, corporate strategy and compliance areas. The back office is basically split in two operating divisions – one that deals with the operations of the bank, and another that deals with the technological aspects of the bank.

Investment Banking Industry

The investment banking industry has experienced steady growth during the past ten years, with a record $84 billion dollars being invested in the investment banking industry in 2007. However, some investment banks have taken losses since 2007 because of the issue with U.S. Subprime securities and the struggling economy. The investment banking industry is concentrated to a small number of influential cities, including London, Hong Kong, New York City and Tokyo. Investment banking is a global financial industry, and therefore faces challenges adapting to global financial shifts and economic turbulence. New investment products with higher profit margins are being developed and introduced regularly to stimulate and promote continued growth.