Investment Bank
INVESTMENT
BANKING:
AN OVERVIEW
INVESTMENT BANKING
WHAT DO
THEY REALLY
DO?
WHAT DO THESE PROJECTS HAVE IN
COMMON?
Affordable housing
Small businesses
ISAW
Bridges
Big corporations
SM
GE
GS
ISAW
BIG OR SMALL,
THEY ALL NEED
CAPITAL.
WHAT DO INVESTMENT BANKERS DO?
Traditional role: assisting clients
client
WHAT DO INVESTMENT BANKERS DO?
Traditional role
A) Raising Capital:
“Underwriting”
B) Buying or merging with other businesses:
“Financial Advisory”
WHAT DO INVESTMENT BANKERS DO?
Over time I.B. has evolved and engaged in different activities
1920s
2000s
A) Trading, Brokerage, and “market making”
B) Asset Management
C) Investment
WHAT DO INVESTMENT BANKERS DO?
Clients
Big corporations
SM
Government
Indiividuals
PNOY
GE
GS
Investment banks do not engage in retail banking
DIFFERENCES
WITH
COMMERCIAL
BANKING
DIFFERENCES WITH COMMERCIAL BANKING
DEPOSITS
LOANS
DIFFERENCES WITH COMMERCIAL BANKING
1933 Glass-Steagall Act
In the US, Investment and Commercial banking activities were separated
- I.B.’s were no longer allowed to receive customer deposits and offer retail banking services.
- Comm. Banks no longer allowed to underwrite securities.
Glass-Steagall Act repealed in 1999.
Today
Today, large US banks (e.g., Bank of America, Citigroup, JP Morgan-Chase) perform both type of activities, like other large international banks (e.g.,
Deutsche Bank, HSBC, UBS)
Only a few large “pure play” investment banks remain: Goldman Sachs &
Morgan Stanley
ORIGINS OF
INVESTMENT
BANKING
ORIGINS OF INVESTMENT BANKING
Merchant Banking
Merchants offering credit to their clients by accepting commercial “bills of exchange” e.g. Common in Middle Ages’ Europe
War Financing
Bankers loaned their coins and money to finance the whims and wishes of the kings and princes e.g. wars, invasions, etc.
Repurchase agreements
Banning of interests in loans by the Catholic Church which led to the creation of new financial instruments e.g. paper money, bond
BANKING:
AN OVERVIEW
INVESTMENT BANKING
WHAT DO
THEY REALLY
DO?
WHAT DO THESE PROJECTS HAVE IN
COMMON?
Affordable housing
Small businesses
ISAW
Bridges
Big corporations
SM
GE
GS
ISAW
BIG OR SMALL,
THEY ALL NEED
CAPITAL.
WHAT DO INVESTMENT BANKERS DO?
Traditional role: assisting clients
client
WHAT DO INVESTMENT BANKERS DO?
Traditional role
A) Raising Capital:
“Underwriting”
B) Buying or merging with other businesses:
“Financial Advisory”
WHAT DO INVESTMENT BANKERS DO?
Over time I.B. has evolved and engaged in different activities
1920s
2000s
A) Trading, Brokerage, and “market making”
B) Asset Management
C) Investment
WHAT DO INVESTMENT BANKERS DO?
Clients
Big corporations
SM
Government
Indiividuals
PNOY
GE
GS
Investment banks do not engage in retail banking
DIFFERENCES
WITH
COMMERCIAL
BANKING
DIFFERENCES WITH COMMERCIAL BANKING
DEPOSITS
LOANS
DIFFERENCES WITH COMMERCIAL BANKING
1933 Glass-Steagall Act
In the US, Investment and Commercial banking activities were separated
- I.B.’s were no longer allowed to receive customer deposits and offer retail banking services.
- Comm. Banks no longer allowed to underwrite securities.
Glass-Steagall Act repealed in 1999.
Today
Today, large US banks (e.g., Bank of America, Citigroup, JP Morgan-Chase) perform both type of activities, like other large international banks (e.g.,
Deutsche Bank, HSBC, UBS)
Only a few large “pure play” investment banks remain: Goldman Sachs &
Morgan Stanley
ORIGINS OF
INVESTMENT
BANKING
ORIGINS OF INVESTMENT BANKING
Merchant Banking
Merchants offering credit to their clients by accepting commercial “bills of exchange” e.g. Common in Middle Ages’ Europe
War Financing
Bankers loaned their coins and money to finance the whims and wishes of the kings and princes e.g. wars, invasions, etc.
Repurchase agreements
Banning of interests in loans by the Catholic Church which led to the creation of new financial instruments e.g. paper money, bond