Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to A central bank, reserve bank, or monetary authority is the entity responsible for the Monetary policy of a country or of a group of member states An advising bank (also known as a notifying bank advises a Beneficiary (exporter that a Letter of credit (L/C opened by an issuing bank for an A commercial bank is a type of Financial intermediary and a type of Bank. In the United States, Community development banks (CDBs are Banks designed to serve residents and spur economic development in low- to moderate-income (LMI geographical In Finance, a custodian bank, or simply custodian, refers to a Financial institution responsible for safeguarding a firm's or individual's financial assets A depository bank ( US usage is a bank organized in the United States which provides all the stock transfer and agency services in connection with a Investment banks profit from companies and governments by raising money through issuing and selling Securities in the Capital markets (both equity and Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law ( Sharia) principles and guided by Islamic economics In banking, a merchant bank is a financial institution primarily engaged in international finance and long-term loans for multinational corporations and governments A mutual savings bank is a Financial institution chartered through a state or federal government to provide a safe place for individuals to save and to Invest A mutual savings bank is a Financial institution chartered through a state or federal government to provide a safe place for individuals to save and to Invest The term national Bank has several meanings especially in Developing countries, a bank owned by the State an ordinary private An offshore bank is a Bank located outside the country of residence of the depositor typically in a low tax jurisdiction (or Tax haven) that provides financial Private banks are Banks that are not incorporated. A non-incorporated bank is owned by either an individual or a general partner(s with limited partner(s A savings bank is a Financial institution whose primary purpose is accepting Savings deposits Banking in Switzerland is characterized by stability privacy and protection of clients' assets and information Bank secrecy (or bank privacy) is a legal principle under which Banks are allowed to protect personal information about their customers through the use of Numbered A deposit account is a current account at a Banking institution that allows money to be deposited and withdrawn by the account holder with the transactions and resulting balance Money creation is the process by which Money is produced or issued A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent This is a list of Banks throughout the world Africa Central Bank Bank Government Bank of Canada (Central Bank Business Development Bank of Canada The "Big Six" Canada's Hong Kong maintains a three-tier system of deposit-taking institutions licensed banks restricted licence banks and deposit-taking companies This is a list of Banks with operations in Singapore. Location of incorporation is provided in brackets for foreign banks A security is a Fungible, Negotiable instrument representing financial value The capital market is the Market for securities, where companies and Governments can raise longterm funds In accounting terms after all liabilities are paid ownership equity is the remaining interest in Assets If valuations placed on assets do not exceed liabilities In Finance, a bond is a Debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and Interest Until the late 1980s, the United States and Canada maintained a separation between investment banking and commercial banks. A commercial bank is a type of Financial intermediary and a type of Bank.
A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities. In Finance and Economics, divestment or divestiture is the reduction of some kind of Asset for either financial goals or ethical objectives Derivatives are Financial instruments whose values depend on the value of other underlying financial instruments Fixed income refers to any type of Investment that yields a regular (or fixed return The foreign exchange ( currency or forex or FX) market refers to the market for currencies. A commodity is anything for which there is demand but which is supplied without qualitative differentiation across a market Software for Fixed assets management and Stock control developed in 2004.
Trading securities for cash or securities (i. e. , facilitating transactions, market-making), or the promotion of securities (i. e. , underwriting, research, etc. ) is referred to as the "sell side. Sell side is an expression used in Financial markets. It refers to firms that take orders from Buy side firms and then work the orders "
Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment constitutes the "buy side". A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a Pension plan for the exclusive purpose of financing pension A mutual fund is a professionally managed type of collective investments that pools money from many investors and Invests it in Stocks bonds, A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment Buy side is a financial term used in financial security trading Many firms have buy and sell side components
Contents |
Organizational structure of an investment bank
The main activities and units
On behalf of the bank and its clients, the primary function of the bank is buying and selling products. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Proprietary trading is a term used in Investment banking to describe when the firm's traders actively trade Stocks bonds options, Commodities Banks seek to maximize profitability for a given amount of risk on their balance sheet.
An investment bank is split into the so-called Front Office, Middle Office, and Back Office. In Business, front office refers To Sales and Marketing divisions of a company The middle office comprises departments of a Financial services company that manage position-keeping (i A back office is a part of most Corporations where tasks dedicated to running the company itself take place
Front Office
- Investment banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. In Business, front office refers To Sales and Marketing divisions of a company Funding or financing is to provide capital (funds which means money for a project a person a business or any other private or public institutions The capital market is the Market for securities, where companies and Governments can raise longterm funds These jobs tend to be extremely competitive and difficult to land. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the investment banking division include mergers and acquisitions (M&A) and corporate finance. Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt.
- Investment management is the professional management of various securities (shares, bonds, etc. In financial markets, a share is a Unit of account for various financial instruments including Stocks Mutual funds Limited partnerships BOND (Building Object Network Databases started development in late 2000 as a Rapid application development tool for the GNOME Desktop by Treshna ) and other assets (e. g. real estate), to meet specified investment goals for the benefit of the investors. Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom Investors may be institutions (insurance companies, pension funds, corporations etc. Insurance, in Law and Economics, is a form of Risk management primarily used to hedge against the Risk of a contingent loss A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a Pension plan for the exclusive purpose of financing pension A corporation is a separate legal entity usually used to conduct business ) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. An angel investor or angel (known as a business angel or informal investor in Europe) is an affluent individual who provides capital for a business mutual funds). A mutual fund is a professionally managed type of collective investments that pools money from many investors and Invests it in Stocks bonds, The Investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services. Asset Management deals with institutional investors, while Private Wealth Management manages the funds of high net-worth individuals.
- Sales & Trading In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. A market maker is a firm that quotes both a buy and a sell price in a Financial instrument or Commodity, hoping to make a profit on the turn Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Caveat emptor is Latin for "Let the buyer beware" Generally caveat emptor is the Property law doctrine that controls the sale of Real Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.
- Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. Derivatives are Financial instruments whose values depend on the value of other underlying financial instruments The necessity for numerical ability has created jobs for physics and math Ph.D.s who act as quants. "PhD" redirects here for other uses see PhD (disambiguation. A quantitative analyst is a person who works in finance using numerical or quantitative techniques
- Merchant banking is a private equity activity of investment banks. In Finance, private equity is an Asset class consisting of equity Securities in operating companies that are not Publicly traded on [1] Examples include Goldman Sachs Capital Partners and JPMorgan One Equity Partners. Sometimes, merchant banking is a part of Alternative Investment division.
- Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. A sell-side analyst works for a Brokerage firm and evaluates companies for future earnings growth and other investment criteria While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions. In business a Chinese Wall or firewall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons
- Strategy is the division which advises external as well as internal clients on the strategies that can be adopted in various markets. A Strategy is a long term plan of action designed to achieve a particular goal, most often "winning Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products.
Middle Office
- Risk Management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. The middle office comprises departments of a Financial services company that manage position-keeping (i For non-business risks see Risk or the disambiguation page Risk analysis. Market risk is the Risk that the value of an investment will decrease due to moves in market factors Credit risk is the risk of loss due to a debtor's non-payment of a Loan or other line of credit (either the principal or Interest (coupon or both Faced Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). A counterparty (sometimes contraparty) is a legal and financial term In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk. An operational risk is a risk arising from execution of a company's business functions When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.
- Finance areas are responsible for an investment bank's capital management and risk monitoring. The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated By tracking and analyzing the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer. A comptroller or controller (kənˈtroʊlər ˈkɑmˌtroʊ- also financial controller, abrv
- Compliance areas are responsible for an investment bank's daily operations' compliance with FSA regulations and internal regulations. Often also considered a back-office division.
Back Office
- Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. A back office is a part of most Corporations where tasks dedicated to running the company itself take place While some believe it provides the greatest job security with the bleakest career prospects of the divisions within an investment bank, many have outsourced operations. It is however a critical part of the bank that involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function. In recent years due to increased competition in finance related careers, college degrees are now mandatory at most Tier 1 investment banks. A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank.
- Technology refers to the IT department. Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading platforms. These platforms can serve as auto-executed hedging to complex model driven algorithms.
An investment bank can also be split into private and public functions with a Chinese wall which separates the two to prevent information from crossing. In business a Chinese Wall or firewall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information. Insider trading is the trading of a Corporation 's Stock or other securities (e
Size of industry
Global investment banking revenue increased for the fifth year running in 2007, to $84. 3 billion. [2] This was up 21% on the previous year and more than double the level in 2003. Despite a record year for fee income, many investment banks have experienced large losses related to their exposure to US sub-prime securities investments.
The US was the primary source of investment banking income in 2007, with 53% of the total, a proportion which has fallen somewhat during the past decade. The United States of America —commonly referred to as the Europe (with Middle East and Africa) generated 32% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 15%. Over the past decade, fee income from the US increased by 80%. This compares with a 217% increase in Europe and 250% increase in Asia during this period.
Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, it is only known that many have theorized that all investment banking products and services would be commoditized. A commodity is anything for which there is demand but which is supplied without qualitative differentiation across a market New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins. A patent is a set of Exclusive rights granted by a State to an inventor or his assignee for a fixed period of time in exchange for a disclosure of an Copyright is a legal concept enacted by Governments, giving the creator of an original work of authorship Exclusive rights to control its distribution usually for
For example, trading bonds and equities for customers is now a commodity business, but structuring and trading derivatives is highly profitable. Software for Fixed assets management and Stock control developed in 2004. Derivatives are Financial instruments whose values depend on the value of other underlying financial instruments Each OTC contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities. The Chicago Board Options Exchange ( CBOE) located at 400 South LaSalle Street in Chicago, is largest U
In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients).
The fastest growing segment of the investment banking industry are private investments into public companies (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and accredited investors. These PIPE transactions are non-rule 144A transactions. Large buldge bracket brokerage firms and smaller boutique firms compete in this sector. Special purpose acquisition companies (SPACs) or blank check corporations have been created from this industry.
Vertical integration
In the US, the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities which led to segregation of investment banks from commercial banks. The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC in the United States and included banking reforms some of which The Wall Street Crash of 1929, also known as the ’29 Crash, the Crash of 1929, the Great Crash of 1929, the Great Crash of October 1929 A commercial bank is a type of Financial intermediary and a type of Bank. Glass-Steagall was effectively repealed for many large financial institutions by the Gramm-Leach-Bliley Act in 1999. The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act,, is an Act of the United States Congress Year 1999 ( MCMXCIX) was a Common year starting on Friday (link will display full 1999 Gregorian calendar)
Another development in recent years has been the vertical integration of debt securitization. In Microeconomics and Management, the term vertical integration describes a style of Management control. Previously, investment banks had assisted lenders in raising more lending funds and having the ability to offer longer term fixed interest rates by converting the lenders' outstanding loans into bonds. For example, a mortgage lender would make a house loan, and then use the investment bank to sell bonds to fund the debt, the money from the sale of the bonds can be used to make new loans, while the lender accepts loan payments and passes the payments on to the bondholders. This process is called securitization. However, lenders have begun to securitize loans themselves, especially in the areas of mortgage loans. Because of this, and because of the fear that this will continue, many Investment Banks have focused on becoming lenders themselves,[3] making loans with the goal of securitizing them. In fact, in the areas of commercial mortgages, many investment banks lend at loss leader interest rates in order to make money securitizing the loans, causing them to be a very popular financing option for commercial property investors and developers.
Possible conflicts of interest
Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between investment banking on one side and equity research and trading on the other. The Financial Services Authority ( "FSA") is an independent non-governmental body Quasi-judicial body and a company limited by guarantee that regulates The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom, the UK or Britain,is a Sovereign state located The US Securities and Exchange Commission (commonly known as the SEC) is an independent agency of the United States government which holds primary responsibility The United States of America —commonly referred to as the In business a Chinese Wall or firewall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons
Some of the conflicts of interest that can be found in investment banking are listed here:
- Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble.
- Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.
- Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in some form of front running. Front running is the illegal practice of a Stock broker executing orders on a security for their own account (and thus affecting prices before filling Front running is the illegal practice of a stock broker executing orders on a security for their own account (and thus affecting prices) before filling orders previously submitted by their customers.
References
List and ranks
External links
The following is a list of investment banks Financial conglomerates Large financial-services conglomerates combine Commercial banking and Investment bankingDapyx Software network: MP3 Explorer | Ebook Manager | Zenithic