What is an Investment Bank

Investment Bank vs Commercial Bank

• Commercial Bank

  • provide cash management services for companies

  • collects deposits

  • makes loans

• Investment Bank

  • raise capital through stock and bond offerings

  • provides companies advice on M&A, sales of businesses

    • funded through the public markets

    • also operate trading desk to stocks, bonds loans and derivatives

Examples of Commercial & Investment Banks

Commercial Bank

• Capital One

• Atlantic Union Bank

• Credit Cards

Investment Banks

• Goldman Sachs

• JP Morgan

• Bank of America

• Citi Group

• Morgan Stanley

Major Global Investment Banks

• US

  • Bank of America, JP Morgan, Citigroup, Goldman Sachs, Morgan Stanley, Wells fargo

• Europe

  • Barclays, HSBC, Deutsche Bank

• Asia

  • Nomura, Sumitomo

Structure of an Investment Bank

• investment banking (90% of profit comes from)

• sales and trading (90% of profit comes from)

• research

• operations

• risk management

• compliance

• corporate

Investment Bank groups of professionals

Product / Deal

• does 1 type of deal

• debt offerings,

• equity offerings

• mergers & acquisitions

Industry Specialist

• Capital Markets

• Mergers & Acquisitions

• Restructuring

How is a Deal Staffed?

Bankers from the relevant industry and deal specialist

Sales Trading

• traders buy/sell in bonds, stocks, loans and derivatives in the secondary market

• salespeople have 2 functions

  • sell new stock, bonds, and loan issues

  • find buyers for firms traders

• most trading desk have a team that provides data, analyses and recommendations to the traders, salespeople, and clients

Risk from Sales & Trading

• traders can loose money

• client backlash

• traders break the rules

  • Legal issues are always worst

Research

• group analyzes stocks, bonds and publishes buy/hold/sell recommendations

• analyze markets and economies

• research is on the Public side of the Chinese Wall

  • it drives trading business

Operations

• BIT people

  • process trades

  • maintain data and customer records

  • maintain electronic systems within the firm

Risk management (financial risk)

• make sure traders don’t do stupid things!

• trading risk → taking risky products

• deals with guarantees

• counterparty risk → firms you trade with default on payments

Compliance (legal risk)

• set up rules of firms

• monitor emails

• train people

• most are attorneys but not all

• are valuable when regarding weather activity is legal or not

Corporate

human resources

• hire and fire employees, setting policies for interactions between employees

accounting

• accumulates, analyzes and reports financial data

treasury

• manages firms cash needs

Why are there Trading Groups

• no centralized market

• buy low, sell high

• buy products that attract investors

Chinese Wall

• prevents insider trading → which is a crime

• series of information barriers separating parts of an investment bank

• investment bankers have access to corporate information that the public DOESN’T have

How does an investment bank make money?

• fees from raising capital (stock, bond)

• fees from advice related to mergers, acquisitions, etc

• trading profits and commissions (more unpredictable)

Key Risk

• underwriting risk

  • underwriting deals that they cant sell

• trading risk

  • lose money on trades

• legal risk

  • worst then trading risk bc you can be shut down

• reputational risk

  • lose customers

How do investment banks help the economy?

• companies need to buy and sell for efficiency → which means they ask Wall Street

• want to regulate investment banks correctly

“Too Big to Fail”

• so big you cant let them go bankrupt

  • raises concerns mega banks are too big

  • if they go bankrupt it damages the economy

• ppl argue to have the Glass-Steagall Act back