How do investment banks operate?January 17, 2019
Let us understand a little about investment banks and their operations.
Definition of an Investment Bank.
Investment banks offer funding and advice to clients, corporates and other investors, trade, buy, finance, and sell services, commodities, and financial products to earn money for themselves and their customers. Retail banks offer loans and accept deposits from customers while keeping their money safe.
Modern days have seen banks called universal banks that include both retail and simple investment banking. Example: Barclay’s, Citi and so on. Boutique advisory services, pure investments only banks, and mid-market dealing banks are some other kinds of investment banks.
Who owns them?
Leading US and European investment banks form public companies whose shares are traded on exchanges. The owners of shares own the bank. Some of the major investors are financial institutions, family holdings, bank directors, HNW individuals, government institutions, both private and public banks and investments banks.
Smaller financed investment banks may be partnership firms or privately owned companies.
Who are an investment bank’s main clients?
The main clients of investment banks are:
• Companies: From varied sectors fintech, energy, construction, retail, technology, healthcare, media, food, drinks, chemicals, organisations including financial services and such
• Funds: Are investment tools which pool assets of investors following an investment pattern and include pension funds, equity funds, and hedge funds
• Government: Semi-governmental institutions, export and credit agencies, wealth funds, and governmental funds
• Individuals with high assets: These are investors with surplus assets over1 million $
• Banks: Most banks protect themselves by investment activities, bank trading, and such to earn brokerage and profits for the bank
The main activities of an investment bank are:
• Advisory: Clients are advised regarding selling, buying and IPOs of companies, raising money, the maintaining of financial affairs, trading of financial products and economic risk management
• Management of investments: Both individuals and corporations are advised on investment managing
• Providing loans and financing
• Trading: Trading of shares, derivatives, debt products, commodities etc. to earn brokerage
• Monitoring and research: Industry trends, economic developments, investment patterns etc. for clients and itself
How do they make money?
Investment banks make money by offering these financial services to clients to earn income like
Fees: Advisory charges, finance, and short term funds, for providing loans, keeping money safe for clients, trading services, financing and arranging funds for its clients, research and reports, and investment services generate fees.
Dividends: Shares provide returns on investments.
Interest: Loans generate interest as income.
Investments: Brokerage and profits from making of investments.
Trading: Profits and brokerage made from selling and buying of securities.
What regulates such activity?
Besides government monitoring through regulators and monitoring agencies, the activities are regulated in these areas.
• Adequacy of capital: Banks have to maintain a cash-credit ratio, reserve funds and such.
• Activities undertaken: The operations of particular activities, regulations on operations, differentiation into various divisions, and such regulations prevent problems from spreading to healthy sectors.
• Trading for themselves is also regulated.
• Insider dealing: Prevents banks making unfair profits from client information
• Money laundering: Monitoring to ensure illegal parking of funds, launder money etc
• Transparency: Audits on banks and regulations to disclose their funds status, finances, and activities
• Payments to staff: Regulators scrutinize these to prevent excessive risk to the bank
Why does the economy need them?
Investment banks are integral to the financial global ecosystem. They are crucial for the system and offer stability through their services like
• Providing businesses finance
• Advisory services
• Managing risks
• Providing research, strategy, and information
If you wish to learn more about investment, you can learn investment banking course.