Investment Bank

Topics: Bank, Finance, Banking Pages: 7 (446 words) Published: April 19, 2015
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Glass-Steagall Act repealed in 1999.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 issues, jointstock companies

ORIGINS OF INVESTMENT BANKING
Industrialization
Investment banks were the fuel of the industrialisation of the Western World in the 19th century through lending, investing, selling securities, trades, etc.

Rise of Middle Class
Charles Merrill’s brokerage business

FINANCIAL
INNOVATION
Financial
Derivatives

Securitization

Electronic
Trading & FX

BUSINESS OF
INVESTMENT BANKING
DEBT

EQUITY

M&A

TRADING ACTIVITIES OF
INVESTMENT BANKING
Sell/Buy

Prop trading

Research &
Analysis

ASSET MANAGEMENT
ACTIVITIES
Mutual Funds

Alternative
investments

Private &
Institutional
clients

PRINCIPAL INVESTMENT
ACTIVITIES
Public and
Private
companies

Real
Estate
& Project
Finance

Bonds and
other
securities

HOW DO
INVESTMENT BANKS
MAKE MONEY?

REMUNERATION OF INVESTMENT BANKS
Fees
Traditional source of income
-Spreads on volume of capital raised (underwriting fees and
management fees)
-Advisory fees for M&A deals (success fees)
-Percentage of assets under management
-Brokerage fees, escrow fees, etc

Trading
Profits or losses

WHY INVESTMENT
BANKING?
Essential
for economic
growth

Lucrative
business

There’s
money in it

INVESTMENT
BANKING:
AN OVERVIEW

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