Introduction to Investment Banking

An investment bank is a financial institution that assists individuals, corporations, and

governments in raising financial capital by underwriting or acting as the client's agent in the

issuance of securities (or both). An investment bank may also assist companies involved

in mergers and acquisitions (M&A) and provide ancillary services such as market making,

trading of derivatives and equity securities, and FICC services (fixed

income instruments, currencies, and commodities).

Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933

(Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley Act), the United States maintained a

separation between investment banking and commercial banks. Other industrialized countries,

including G8 countries, have historically not maintained such a separation. As part of the Dodd–

Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act of

2010), Volcker Rule asserts full institutional separation of investment banking services from

commercial banking.

The two main lines of business in investment banking are called the sell side and the buy side.

The "sell side" involves trading securities for cash or for other securities (e.g. facilitating

transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.).

The "buy side" involves the provision of advice to institutions concerned with buying investment

services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge

funds are the most common types of buy side entities.

An investment bank can also be split into private and public functions with an information

barrier which separates the two to prevent information from crossing. 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.

An advisor who provides investment banking services in the United States must be a

licensed broker-dealer and subject to U.S. Securities and Exchange Commission (SEC)

andFinancial Industry Regulatory Authority (FINRA) regulation.[1]

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History

The first company to issue publicly traded stock was the Dutch East India Company (Verenigde

Oostindische Compagnie, or "VOC"), which traded on the Amsterdam Stock Exchange.

Investment banking has changed over the years, beginning as a partnership form focused on

underwriting security issuance, i.e. initial public offerings (IPOs) and secondary market

offerings, brokerage, and mergers and acquisitions, and evolving into a "full-service" range

including securities research, proprietary trading, and investment management. In the modern

21st century, the SEC filings of the major independent investment banks such as Goldman

Sachs and Morgan Stanley reflect three product segments: (1) investment banking (fees for

M&A advisory services and securities underwriting); (2) asset management (fees for sponsored

investment funds), and (3) trading and principal investments (broker-dealer activities including

proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions)).

In the United States, commercial banking and investment banking were separated by the Glass–

Steagall Act, which was repealed in 1999. The repeal led to more "universal banks" offering an

even greater range of services. Many large commercial banks have therefore developed

investment banking divisions through acquisitions and hiring. Notable large banks with

significant investment banks include JPMorgan Chase, Bank of America, Credit

Suisse, Deutsche Bank, Barclays, and Wells Fargo. After the financial crisis of 2007–08 and the

subsequent passage of the Dodd-Frank Act of 2010, regulations have limited certain investment

banking operations, notably with the Volcker Rule's restrictions on proprietary trading.[3]

The traditional service of underwriting security issues has declined as a percentage of revenue.

As far back as 1960, 70% of Merrill Lynch's revenue was derived from transaction commissions

while "traditional investment banking" services accounted for 5%. However, Merrill Lynch was

a relatively "retail-focused" firm with a large brokerage network

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Core investment banking activities

Investment banking is split into front office, middle office, and back office activities. While large

service investment banks offer all lines of business, both "sell side" and "buy side", smaller sell-

side investment firms such as boutique investment banks and small broker-dealers focus on

investment banking and sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors buying

securities. For corporations, investment bankers offer information on when and how to place

their securities on the open market, an activity very important to an investment bank's reputation.

Therefore, investment bankers play a very important role in issuing new security offerings.[3]

Front office

Front office is generally described as a revenue generating role.

There are two main areas within front office:

Investment Banking and Markets, which includes: Sales; Trading; Research; Structuring.

Investment Banking involves advising the world's largest organisations on mergers, acquisitions,

as well as a wide array of fund raising strategies. This is, on average, the most prestigious and

highest paid department in the bank with first year analysts typically making £60,000 upwards

(depending on individual, team and firm performance).

Markets are then split into further divisions; sales, trading, some research and also structuring.

Though the average investment banker will make considerably more than the average trader, the

best trader will make significantly more than the best investment banker.[citation needed]

Investment banking

Corporate finance is the traditional aspect of investment banks which also involves helping

customers raise funds in capital markets and giving advice on mergers and acquisitions (M&A).

This may involve subscribing investors to a security issuance, coordinating with bidders, or

negotiating with a merger target. Another term for the investment banking division is corporate

finance, and its advisory group is often termed "mergers and acquisitions". A pitch book of

financial information is generated to market the bank to a potential M&A client; if the pitch is

successful, the bank arranges the deal for the client. The investment banking division (IBD) is

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generally divided into industry coverage and product coverage groups. Industry coverage groups

focus on a specific industry – such as healthcare, public finance (governments), FIG (financial

institutions group), industrials, TMT (technology, media, and telecommunication) – and

maintains relationships with corporations within the industry to bring in business for the bank.

Product coverage groups focus on financial products – such as mergers and acquisitions,

leveraged finance, public finance, asset finance and leasing, structured finance, restructuring,

equity, and high-grade debt – and generally work and collaborate with industry groups on the

more intricate and specialized needs of a client.

Sales and trading

On behalf of the bank and its clients, a large investment bank's primary function is  buying and

selling products. In market making, traders will buy and sell financial products with the goal of

making money on each trade. Sales is the term for the investment bank's sales force, whose

primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on

a caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the

appropriate trading rooms, which can price and execute trades, or structure new products that fit

a specific need. Structuring has been a relatively recent activity 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.

In 2010, investment banks came under pressure as a result of selling complex derivatives

contracts to local municipalities in Europe and the US. [4] Strategists advise external as well as

internal clients on the strategies that can be adopted in various markets. 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. Banks also undertake risk through proprietary trading,

performed 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. Banks seek to maximize profitability for a given amount of risk on their

balance sheet. The necessity for numerical ability in sales and trading has created jobs

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for physics, computer science, mathematics and engineering Ph.D.s who act as quantitative

analysts.

Research

The securities research division reviews companies and writes reports about their prospects,

often with "buy" or "sell" ratings. Investment banks typically have sell-side analystswhich cover

various industries. Their sponsored funds or proprietary trading offices will also have buy-side

research. While the research division may or may not generate revenue (based on policies at

different banks), its resources are used to assist traders in trading, the sales force in suggesting

ideas to customers, and investment bankers by covering their clients. Research also serves

outside clients with investment advice (such as institutional investors and high-net-worth

individuals) in the hopes that these clients will execute suggested trade ideas through the sales

and trading division of the bank, and thereby generate revenue for the firm. Research also covers

credit research, fixed income research, macroeconomic research, and quantitative analysis, all of

which are used internally and externally to advise clients but do not directly affect revenue. All

research groups, nonetheless, provide a key service in terms of advisory and strategy. There is a

potential conflict of interest between the investment bank and its analysis, in that published

analysis can affect the bank's profits.

Front and middle office

Risk management

Risk management involves analyzing the market and credit risk that an investment bank or its

clients take onto their balance sheet during transactions or trades. Credit risk focuses around

capital markets activities, such as loan syndication, bond issuance, restructuring, and leveraged

finance. Market risk conducts review of sales and trading activities utilizing the VaR model and

provide hedge-fund solutions to portfolio managers. Other risk groups include country risk,

operational risk, and counterparty risks which may or may not exist on a bank to bank basis.

Credit risk solutions are key part of capital market transactions, involving debt structuring, exit

financing, loan amendment, project finance, leveraged buy-outs, and sometimes portfolio

hedging. Front office market risk activities provide service to investors via derivative solutions,

portfolio management, portfolio consulting, and risk advisory. Well-known risk groups in

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JPMorgan Chase, Goldman Sachs and Barclays engage in revenue-generating activities

involving debt structuring, restructuring, loan syndication, and securitization for clients such as

corporates, governments, and hedge funds. J.P. Morgan IB Risk works with investment banking

to execute transactions and advise investors, although its Finance & Operation risk groups focus

on middle office functions involving internal, non-revenue generating, operational risk controls.[5][6][7] Credit default swap, for instance, is a famous credit risk hedging solution for clients

invented by J.P. Morgan's Blythe Masters during the 1990s. The Loan Risk Solutions

group[8] within Barclays' investment banking division and Risk Management and Financing

group[9] housed in Goldman Sach's securities division are client-driven franchises. However, risk

management groups such as operational risk, internal risk control, legal risk, and the one at

Morgan Stanley are restrained to internal business functions including firm balance-sheet risk

analysis and assigning trading cap that are independent of client needs, even though these groups

may be responsible for deal approval that directly affects capital market activities. Risk

management is a broad area, and like research, its roles can be client-facing or internal.

Middle office

This area of the bank includes treasury management, internal controls, and internal corporate

strategy.

Corporate treasury is responsible for an investment bank's funding, capital structure

management, and liquidity risk monitoring.

Internal control tracks and analyzes 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 via dedicated

trading desk product control teams. In the United States and United Kingdom, a comptroller (or

financial controller) is a senior position, often reporting to the chief financial officer.

Internal corporate strategy tackling firm management and profit strategy, unlike corporate

strategy groups that advise clients, is non-revenue regenerating yet a key functional role within

investment banks.

This list is not a comprehensive summary of all middle-office functions within an investment

bank, as specific desks within front and back offices may participate in internal functions.[10]

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Back office

Operations

This involves data-checking trades that have been conducted, ensuring that they are not wrong,

and transacting the required transfers. Many banks have outsourced operations. It is, however, a

critical part of the bank.

Technology

Every major investment bank has considerable amounts of in-house software, created by the

technology team, who are also responsible for technical support. Technology has changed

considerably in the last few years as more sales and trading desks are using electronic trading.

Some trades are initiated by complex algorithms for hedging purposes.

Firms are responsible for compliance with local and foreign government regulations and internal

regulations.

Other businesses

Global transaction banking is the division which provides cash management, custody

services, lending, and securities brokerage services to institutions. Prime brokeragewith

hedge funds has been an especially profitable business, as well as risky, as seen in the bank

run with Bear Stearns in 2008.

Investment management is the professional management of various securities

(shares, bonds, etc.) and other assets (e.g., real estate), to meet specified investment goals for

the benefit of investors. Investors may be institutions (insurance companies, pension

funds, corporations etc.) or private investors (both directly via investment contracts and more

commonly via collective investment schemes e.g., mutual funds). The investment

management division of an investment bank is generally divided into separate groups, often

known as private wealth management and private client services.

Merchant banking can be called "very personal banking"; merchant banks offer capital in

exchange for share ownership rather than loans, and offer advice on management and

strategy. Merchant banking is also a name used to describe the private equity side of a firm.

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[11] Current examples include Defoe Fournier & Cie. and JPMorgan Chase'sOne Equity

Partners. The original J.P. Morgan & Co., Rothschilds, Barings and Warburgs were all

merchant banks. Originally, "merchant bank" was the British English term for an investment

bank.

Industry profile

There are various trade associations throughout the world which represent the industry in

lobbying, facilitate industry standards, and publish statistics. The International Council of

Securities Associations (ICSA) is a global group of trade associations.

In the United States, the Securities Industry and Financial Markets Association (SIFMA) is

likely the most significant; however, several of the large investment banks are members of

the American Bankers Association Securities Association (ABASA)[12] while small investment

banks are members of the National Investment Banking Association (NIBA).

In Europe, the European Forum of Securities Associations was formed in 2007 by various

European trade associations.[13] Several European trade associations (principally the London

Investment Banking Association and the European SIFMA affiliate) combined in 2009 to form

Association for Financial Markets in Europe (AFME).

In the securities industry in China (particularly mainland China), the Securities Association of

China is a self-regulatory organization whose members are largely investment banks.

Criticisms

The investment banking industry, and many individual investment banks, have come under

criticism for a variety of reasons, including perceived conflicts of interest, overly large pay

packages, cartel-like or oligopolic behavior, taking both sides in transactions, and more.[30] Investment banking has also been criticised for its opacity.

Conflicts of interest

Conflicts of interest may arise between different parts of a bank, creating the potential for market

manipulation, according to critics. Authorities that regulate investment banking (the FSA in

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the United Kingdom and the SEC in the United States) require that banks impose a "Chinese

wall" to prevent communication between investment banking on one side and equity research

and trading on the other. Critics say such a barrier does not always exist in practice, however.

Conflicts of interest often arise in relation to investment banks' equity research units, which have

long been part of the industry. A common practice is for equity analysts to initiate coverage of 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 for

investment banking business. Alternatively, companies may threaten to divert investment

banking business to competitors unless their stock was rated favorably. Laws were passed to

criminalize such acts, and 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 after the dot-com bubble.

Philip Augar, author of The Greed Merchants, said in an interview that, "You cannot

simultaneously serve the interest of issuer clients and investing clients. And it’s not just

underwriting and sales; investment banks run proprietary trading operations that are also making

a profit out of these securities."[30]

Many investment banks also own retail brokerages. 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 for them to engage in some form of front running – the illegal practice whereby a

broker executes orders for their own account before filling orders previously submitted by their

customers, there benefiting from any changes in prices induced by those orders.

Documents under seal in a decade-long lawsuit concerning eToys.com's IPO but obtained

by New York Times' Wall Street Business columnist Joe Nocera alleged that IPOs managed by

Goldman Sachs and other investment bankers involved asking for kickbacks from their

institutional clients who made large profits flipping IPOs which Goldman had intentionally

undervalued. Depositions in the lawsuit alleged that clients willingly complied with these

demands because they understood it was necessary in order to participate in future hot issues.

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[32] Reuters Wall Street correspondent Felix Salmon retracted his earlier, more conciliatory,

statements on the subject and said he believed that the depositions show that companies going

public and their initial consumer stockholders are both defrauded by this practice, which may be

widespread throughout the IPO finance industry.[33]The case is ongoing, and the allegations

remain unproven.

Compensation

Investment banking is often criticized for the enormous pay packages awarded to those who

work in the industry. According to Bloomberg Wall Street's five biggest firms paid over $3

billion to their executives from 2003 to 2008, "while they presided over the packaging and sale

of loans that helped bring down the investment-banking system." [34]

The highly generous pay packages include $172 million for Merrill Lynch & Co. CEO Stanley

O'Neal from 2003 to 2007, before it was bought by Bank of America in 2008, and $161 million

for Bear Stearns Co.'s James Cayne before the bank collapsed and was sold to JPMorgan Chase

& Co. in June 2008.[34]

Such pay arrangements have attracted the ire of Democrats and Republicans in the United States

Congress, who demanded limits on executive pay in 2008 when the U.S. government was bailing

out the industry with a $700 billion financial rescue package.[34]

Writing in the Global Association of Risk Professionals, Aaron Brown, a vice president at

Morgan Stanley, says "By any standard of human fairness, of course, investment bankers make

obscene amounts of money."

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What is Investment Banking ?

Off late, a lot of emphasis is being put on financial services that aid companies and businesses

through investment banking. This is because of the profit motive as a result of which all

companies have to do something to increase their portfolios and get better funds as well. A lot of

this comes in the form of bonds, stock transfer etc. but the biggest contribution is made through

investments. Investment banking is the post that helps companies get these

investments. Investment banking is advisory and also applicative.

Many people are quite confused about what investment banking is about. Companies can get a

lot of financial services through investment banking. The bankers who work in this capacity are

usually very well trained and are some of the most talented people in the world of banking, as a

whole. The benefits of investment banking are so universal that investment bankers are always

sought after for a lot of reasons- including consultation, advisory services and also execution of

transactions.

Investment banking is a field that involves many levels of division of work. The investment

banking advice given would differ in different stages, from the smaller levels of the

organizations to the higher levels. The magnitude of the advice given would vary with the level,

of course. The clients are to be advised on matters of business, especially financial. Issues

relating to mergers, acquisitions, bonds, strategies regarding investments, sale of company stocks

to public etc. are also to be discussed. These are the most important financial aspects of running

a company and these are the strategies that would determine a company's success or failure in the

future.

Functions of investment banking

On a broad basis, in order to get the best financial services through investment

banking professionals, companies employ them in two capacities.

1. Consultative: Investment banking is all about financial planning and consultation. After

all, this is the primary function of investment banking. The functions of an investment

banker who is working as a consultant would involve guiding the companies and

providing them with advice on their activities pertaining to investments. Investment

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banking would also influence a company's mergers or acquisitions as well. It involves

providing companies with some advice on how they manage public assets and affairs as

well. In fact, this is a very strategic field of study and work. The functions of an

investment banker might also collide and complement with the works of a private

broker who also give advice regarding buying and selling assets to companies,

so brokerage and investment banking are related fields.

2. Transactions: Investment banking also involves taking practical steps towards achieving

what has been adviced on. In larger firms and companies, the functions of investment

banking would be limited to an advisory capacity, because the larger firms prefer to

contemplate on the advice given and make the decisions themselves. However, for

smaller companies that wish to expand, getting an outside consultant to help out with the

implementation of the advice given throughinvestment banking professionals would be

a really good option. Smaller companies to require more guidance.

Differences between commercial and investment banking

Not a lot of people bother finding out what is investment banking about. There are a lot

of guidelines of investment banking that would differentiate this field from commercial

banking. Commercial banking basically deals with account management, handling loans, making

standard investments that are related to banks mostly. However, corporate investments are

different. However, these are not investments that happen at a large level by big companies. In

fact, for a long time, in the United States, it was illegal for banks to have a commercial and

investment divisions until the Gramm Leach Bliley Act was passed in 1999. A lot of institutions

now offer both the banking and commercial solutions as well. One can choose to work in either

of these two branches of banking. The guidelines of investment banking makes this field a lot

more strategic and macro financial systems than commercial banking, which would deal with

loan giving and the other traditional solutions associated with banking.

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Uses of investment banking

So, let us break it down into really simple terms. All of us are interested in knowing the

guidelines of investment banking in the sense that we want to know what exactly it does. So, in

simple terms, here is a recapitulation of what is investment banking about:

It is about helping a firm, company, agencies of the government or the government itself

with the issue of and sale of securities, bonds, stocks etc. In fact, this is one of the main

reasons why people confuse brokerage with investment banking, because the relation

between these two professions is quite deep.

It helps organizations figure out how much money they need to sustain or expand.

Companies rely on investment bankers to find out how much money they need.

These companies also help companies find out what kind of futures and securities they

need to get. Investment bankers would have to figure out what kind of price these

securities would have to be sold at as well.

They also try figuring out what kind of stocks the company needs to sell and in what

fashion because this will aid the company in expanding its earnings as well.

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Investment bankers do not only help companies and firms, they also aid individuals by

giving them some advice on investments they should be making.

Advantages of Mutual Fund as an Investment Option

Safety of Mutual Fund Investment: Safety is a priority for any investor, and investing mutual

funds assures that. If a mutual fund business crashes the mutual fund investors get a sum of

money that is equivalent to their share of tenure in the mutual fund. On the other hand, the Board

of Directors of the mutual fund may select a new investment consultant to administer the funds.

Diversification Is Offered: Diversification is a fundamental principle of investing. It is basically

the custom of producing an array of products, investing in an array of collaterals, marketing an

array of goods and so on. This prevents the funds from being ruinously affected in case of a

collapse or an economic fall.

Mutual Funds Are Resourcefully Handled: Because it is unfeasible for many shareholders to

buy individual stocks, mutual fund analysts research and evaluate present and latent asset for

their mutual fund.

Transparency: Mutual fund shares are openly accessible (although there may be delays in

reporting), ensuring shareholders receive what they disburse.

Assessed Track Records: Investors can trust the mutual fund's proceeds as the company must

look after track records for each fund and have them assessed for thoroughness.

Disadvantages of Mutual Fund as an Investment Option

Excessive Charges: A complete research of the options is necessary as the fee charged by the

managing board can be relatively high. Mutual funds are liable to market risks and resources

risks. Huge losses are incurred if the investment is not sufficiently diversified.

Tax Concerns: Mutual funds do not guarantee reduced tax charges; especially in case of interim

gains the tax bills are usually excessive. In addition, the fund manager is the one managing these

concerns and hence terms on the sum of tax to be paid cannot be directed.

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Shareholder Issues: When new candidates continually invest in the mutual funds the value of

shares owned by current shareholder drops dramatically. A continuing analysis of the size of

investment and its potential asset areas is required for a mutual fund.

Company profile: A mutual fund business is exemplified by regular replacements in job

positions. This constant changing of fund managers can unfavorably affect the returns on the

investment.

Too Much Diversification: High returns from a few reserves usually don't make much variance

on the returns in general since funds have small assets in various companies. When lucrative

funds get too big, the manager has difficulty acquiring a good investment for the new funds.

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Financial services

Financial services are the economic services provided by the finance industry, which

encompasses a broad range of organizations that manage money, including credit

unions,banks, credit card companies, insurance companies, accountancy companies, consumer

finance companies, stock brokerages, investment funds, real estate funds and somegovernment

sponsored enterprises.

As of 2004, the financial services industry represented 20% of the market capitalization of

the S&P 500 in the United States. The U.S. finance industry comprised only 10% of total non-

farm business profits in 1947, but it grew to 50% by 2010. Over the same period, finance

industry income as a proportion of GDP rose from 2.5% to 7.5%, and the finance industry's

proportion of all corporate income rose from 10% to 20%.

The history of financial services

The term "financial services" became more prevalent in the United States partly as a result of

the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies

operating in the U.S. financial services industry at that time to merge.

Companies usually have two distinct approaches to this new type of business. One approach

would be a bank which simply buys an insurance company or an investment bank, keeps the

original brands of the acquired firm, and adds the acquisition to its holding company simply to

diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial services companies are

permitted within the holding company. In this scenario, each company still looks independent,

and has its own customers, etc. In the other style, a bank would simply create its own brokerage

division or insurance division and attempt to sell those products to its own existing customers,

with incentives for combining all things with one company.

Commercial banking services

A "commercial bank" is what is commonly referred to as simply a "bank". The term

"commercial" is used to distinguish it from an "investment bank," a type of financial services

entity which, instead of lending money directly to a business, helps businesses raise money from

other firms in the form of bonds (debt) or stock (equity).

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The primary operations of banks include:

Keeping money safe while also allowing withdrawals when needed

Issuance of chequebooks so that bills can be paid and other kinds of payments can be

delivered by post

Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a

home, property or business)

Issuance of credit cards and processing of credit card transactions and billing

Issuance of debit cards for use as a substitute for cheques

Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)

Provide wire transfers of funds and Electronic fund transfers between banks

Facilitation of standing orders and direct debits, so payments for bills can be made

automatically

Provide overdraft agreements for the temporary advancement of the Bank's own money to

meet monthly spending commitments of a customer in their current account.

Provide internet banking system to facilitate the customers to view and operate their

respective accounts through internet.

Provide Charge card advances of the Bank's own money for customers wishing to settle

credit advances monthly.

Provide a check guaranteed by the Bank itself and prepaid by the customer, such as

a cashier's check or certified check.

Notary service for financial and other documents

Accepting the deposits from customer and provide the credit facilities to them.

Sell Investment products like Mutual funds etc.

Investment banking services

Capital markets services - underwriting debt and equity, assist company deals (advisory

services, underwriting, mergers and acquisitions and advisory fees), and restructure debt

into structured finance products.

Private banking - Private banks provide banking services exclusively to high-net-worth

individuals. Many financial services firms require a person or family to have a certain

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minimum net worth to qualify for private banking services.[2] Private banks often provide

more personal services, such as wealth management and tax planning, than normal retail

banks.[3]

Brokerage services - facilitating the buying and selling of financial securities between a

buyer and a seller. In today's (2014) stock brokers, brokerages services are offered online to

self trading investors throughout the world who have the option of trading with 'tied' online

trading platforms offered by a banking institution or with online trading platforms sometimes

offered in a group by so-called online trading portals.

Foreign exchange services

Foreign exchange services are provided by many banks and specialist foreign exchange

brokers around the world. Foreign exchange services include:

Currency exchange - where clients can purchase and sell foreign currency banknotes.

Wire transfer - where clients can send funds to international banks abroad.

Remittance - where clients that are migrant workers send money back to their home country.

Investment services

Asset management - the term usually given to describe companies which run collective

investment funds. Also refers to services provided by others, generally registered with the

Securities and Exchange Commission as Registered Investment Advisors. Investment banking

financial services focus on creating capital through client investments.

Hedge fund management - Hedge funds often employ the services of "prime brokerage"

divisions at major investment banks to execute their trades.

Custody services - the safe-keeping and processing of the world's securities trades and servicing

the associated portfolios. Assets under custody in the world are approximately US$100 trillion.[4]

Insurance

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Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and

casualty insurance) on behalf of customers. Recently a number of websites have been created to

give consumers basic price comparisons for services such as insurance, causing controversy

within the industry.[5]

Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for

individuals, a service still offered primarily through agents, insurance brokers, and stock brokers.

Underwriters may also offer similar commercial lines of coverage for businesses. Activities

include insurance and annuities, life insurance, retirement insurance, health insurance,

and property & casualty insurance.

F&I - Finance & Insurance, a service still offered primarily at asset dealerships. The F&I

manager encompasses the financing and insuring of the asset which is sold by the dealer. F&I is

often called "the second gross" in dealerships who have adopted the model

Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from

catastrophic losses.

Other financial services

Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of

bank cards

Credit card machine services and networks - Companies which provide credit card machine and

payment networks call themselves "merchant card providers".

Intermediation or advisory services - These services involve stock brokers (private client

services) and discount brokers. Stock brokers assist investors in buying or selling shares.

Primarily internet-based companies are often referred to as discount brokerages, although many

now have branch offices to assist clients. These brokerages primarily target individual investors.

Full service and private client firms primarily assist and execute trades for clients with large

amounts of capital to invest, such as large companies, wealthy individuals, and investment

management funds

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Private equity - Private equity funds are typically closed-end funds, which usually take

controlling equity stakes in businesses that are either private, or taken private once acquired.

Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they

invest. The most successful private equity funds can generate returns significantly higher than

provided by the equity markets.

Venture capital is a type of private equity capital typically provided by professional, outside

investors to new, high-growth-potential companies in the interest of taking the company to an

IPO or trade sale of the business.

Angel investment - 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 start-up, usually in

exchange for convertible debt or ownership equity. A small but increasing number of angel

investors organize themselves into angel groups or angel networks to share resources and pool

their investment capital.

Conglomerates - A financial services company such as a universal bank that is active in more

than one sector of the financial services market e.g. life insurance, general insurance, health

insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key

rationale for the existence of such businesses is the existence of diversification benefits that are

present when different types of businesses are aggregated i.e. bad things don't always happen at

the same time. As a consequence, economic capital for a conglomerate is usually substantially

less than economic capital is for the sum of its parts.

Financial market utilities - Organisations that are part of the infrastructure of financial

services, such as stock exchanges, clearing houses, derivative and

commodityexchanges and payment systems such as real-time gross settlement systems

or interbank networks.

Debt resolution is a consumer service that assists individuals that have too much debt to pay

off as requested, but do not want to file bankruptcy and wish to pay off their debts owed.

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This debt can be accrued in various ways including but not limited to personal loans, credit

cards or in some cases merchant accounts.

Financial crime

UK

Fraud within the financial industry costs the UK (regulated by the FSA) an estimated £14bn a

year and it is believed a further £25bn is laundered by British institutions.[6]

Market share

US

The U.S. finance industry comprised only 10% of total non-farm business profits in 1947, but it

grew to 50% by 2010. Over the same period, finance industry income as a proportion of GDP

rose from 2.5% to 7.5%, and the finance industry's proportion of all corporate income rose from

10% to 20%. The mean earnings per employee hour in finance relative to all other sectors has

closely mirrored the share of total U.S. income earned by the top 1% income earners since 1930.

The mean salary in New York City's finance industry rose from $80,000 in 1981 to $360,000 in

2011, while average New York City salaries rose from $40,000 to $70,000. In 1988, there were

about 12,500 U.S. banks with less than $300 million in deposits, and about 900 with more

deposits, but by 2012, there were only 4,200 banks with less than $300 million in deposits in the

U.S., and over 1,801 .

The financial services industry constitutes the largest group of companies in the world in terms

of earnings and equity market capitalization. However it is not the largest category in terms of

revenue or number of employees. It is also a slow growing and extremely fragmented industry,

with the largest company (Citigroup), only having a 3% US market share.[7] In contrast, the

largest home improvement store in the US, Home Depot, has a 30% market share, and the largest

coffee house Starbucks has a market share of 32%

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Services offered by Investment Bankers 

Investment banking is a service business, and the client should expect top-notch service from the

investment banking firm. 

Generally only large client firms will get this type of service from the major Wall Street

investment banks. An investment bank is more specialized organization that takes in your money

and after analyzing the possible risks and economic conditions gives you advice to convert it into

more money. 

Typically, an investment banking group nowadays provides world-wide some or all of the

following services, either in divisions of the bank or in associated companies within the group:

1. Mergers and Acquisition Advisory

2. Private Placement of Debt and Equity

3. Securities Underwriting

4. Management of Capital issues

5. Management of Buyback and takeovers 

6. Corporate Advisory Services

7. Project Advisory Services

8. Other services like Restructuring/Sales, Real Estate, Loan Syndication and so on.

The core services provided by the Investment banks are in the areas of debt market, equity

market and advisory services. 

They are:

1. Merger and Acquisition Advisory

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate

strategy, corporate finance and management dealing with the buying, selling and combining of

different companies that can aid, finance, or help a growing company in a given industry grow

22

rapidly without having to create another business entity.

In business or economics a merger is a combination of two companies into one larger company.

Merger is a tool used by companies for the purpose of expanding their operations often aiming at

an increase of their long term profitability. 

An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another.

An acquisition may be friendly or hostile. Acquisition usually refers to a purchase of a smaller

firm by a larger one. 

In the former case, the companies cooperate in negotiations; in the latter case, the takeover target

is unwilling to be bought or the target's board has no prior knowledge of the offer. 

Historically, Investment Banks have been closely associated with merger and acquisition activity

since a merger or acquisition is a sales opportunity for them. Mergers and Acquisitions is one of

the most admitted departments in Investment Banking.

It is a fee-based advisory service, that assist the companies in acquiring other companies. In a

merger, the key function of investment banker is the search and identification of the other party

to the deal and other critical functions relating to preparation and circulation of the information

memorandum, deal structuring and negotiation with party to the deal.

In acquisitions and takeovers involving open offers, the investment banker plays the dual role of

an investment bank as well as the merchant bank. Their role is in managing the public offer and

ensuring the compliance with the SEBI takeover code.

Investment Banker are always at the forefront of the acquisition process. They offer strategic and

tactical advice, valuation and deal structuring, valuation of shares, etc. Investment banker is

appointed by both the parties of the deal and the plan prepared by two bankers are compared

together. It helps the firm in indentifying its strategic objectives and helps it in achieving those

objectives. Valuation of business is the most critical aspect of M&A exercise and has an impact

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on cash-flows, profitability and taxability. It helps in optimizing these aspects. 

Thus, Investment Banks position themselves to act as advisors on Mergers and Acquisitions.

2. Private Placement of Debt and Equity

Debt is that which is owed; usually referencing assets owed. Some companies and corporations

use debt as a part of their overall corporate finance strategy.

At the start of a business, owners put some funding into the business to finance assets. In

accounting terms, ownership equity is the remaining interest in all assets after all liabilities are

paid. Equity capital is defined as the amount of capital provided by the company's owner(s).

Providing new equity (an "issuance" of new equity) gives the firm new capital and increases

owners' equity by the same amount and time needed. 

The private placement market for debt securities essentially consists of medium and the long

term debt securities such as debentures and bonds being placed privately with select investors. In

India, private placement of securities is preferred to public issue since the placement costs are

lower and the investors are mostly financial institutions. 

There are three main constituents in this market-issuers, the investors and both these are brought

together the investment banker who acts as the arranger to the placement. The deal process starts

with the issuer rolling out with the plan to raise fund through the private placement route. The

first step in this direction would be to appoint an investment bank as an arranger to the whole

placement. 

The arranger or the placement agent, as the investment banker may called, is short-listed and the

finalized usually through talks and invitation of quotation. The issuer then furnishes a brief

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profile of itself and the proposed fund raising programmed. Based on such information, the

investment bank put in bids for raising the founds quoting the fees for the same. The arranger

will finalized based on the bid and other qualitative parameters. The investment banker is to

ascertain that the company has taken the necessary approvals from its board. 

The investment banker also help in obtaining the rating for the issues, to make the allotments and

receives the funds from the investors, documentation of private placement, collect the receipt of

commitment letters from the investors and the acceptance thereof by the issuers. After receiving

commitment letter, the issue is treated as closed and issuer puts up the letter of intent for

consideration by its board of directors and the investment bankers has to scrutinize the letter of

intent before it is put up to company’s board.

The placement part of the deal itself is a limited purpose exercise that has no road shows or

publicity campaign as in the public issues. It is largely accomplished through the network of the

investment bankers and the strength of the relationship with the investor community.

Most of the companies, both listed and unlisted categories, make the issue of equity shares to

different shareholders without making a public offer. Such issue can be called as the term private

issue of equity. In the area of private equity financing, the role is more transaction oriented. The

value addition of the investment banker in such a deal is in the valuation and transactions

advisory. However, there are certain caveats that the investment banker has to fully aware of

while raising the private equity for the listed companies. 

These primarily relate to the disclosures of information to the potential investors. However, in

private equity deal, the disclosure is for the purpose of enabling the potential investors to take an

informed investment decision. In this context, the whole process has to be handled with extreme

confidentiality and through suitable documentation. 

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The investment banker has to structure the offer literature including the information

memorandum keeping this issue in mind. The offer literature has to captures the true value

proposition of the company and provides an investor friendly offer structure. It also provides the

other services deemed to ensure a successful outcome to this engagement. This way they are as

good as publicly issued instruments but can be placed easily saving a lot of time and floatation

costs. 

The engagement of investment banker in connection with a private equity transactions can be

summarized as follows:

Identify and initiate contact with the prospective investors, represent or accompany the company

in meetings, presentations and ensuring negotiation with prospective investors, Assists the

company in coordinating due diligence program, Review and advise on proposals/offers from

investors and provide necessary services deemed to ensure a successful outcomes to this

engagement.

Therefore, as far as issuers are concerned, private placement is more convenient and an efficient

way of raising finance and the investment bank play a major role in this regards.

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Risk faced by investment banking

Despite the global financial crisis of 2007- 2008 and the scandals that have rocked the

investment banking industry ever since, most investment banking clients have stayed with their

investment banks and most would still recommend their primary investment banking provider.

These are among the findings that Accenture, working with the polling firm YouGov, has

revealed in a survey of fund managers and corporate executives, designed to gauge their views

on a range of services offered by investment banks. Which services are of greatest value? Which

services are seen as a natural part of any offering? Which additional services are clients willing

to pay the most to receive? These and many more questions were put to 100 respondents across

the United States and the United Kingdom.

Among key survey findings:

Clients are generally satisfied: The vast majority of investment banking clients would

recommend their main investment bank to others, although one third of those surveyed have

changed their main investment bank in the last five years.

Risk management is critical: Risk management services in all forms - including reporting,

advice, tools, and trading –-are a clear priority for investment banking clients of all types.

Basic services are still in demand: Investment banking clients value basic trading services,

execution performance, and analytics, although this follows a five-year, low-volatility bull

market in equities.

Provision of research is still central to investment banking relationships: Research remains

a core product, although standard written reports are valued far less than access to analysts or

corporate executives.

Asset manager clients value electronic trading. Most asset managers use electronic trading

in addition to traditional channels, and often specifically to pay for research.

Opportunity for improvement of institutional client portals. About half of asset managers

surveyed said their bank does not offer a website sufficiently useful for day-to-day

communications.

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There is interest in big data and analytics: Of the Social, Mobility, Analytics and Cloud

(SMAC) technologies, analytics/big data is of the most interest to clients at present.

Some clients have noticed service cuts: Some clients have noticed certain cuts in

differentiated services that investment banks have been forced to make due to expense

reductions.

Coordination of service is important: Most clients value investment banks’ coordination of

services - and it appears that a majority of banks perform this function well.

Clients are well aware of regulation: Clients do understand the costs their investment banks

will incur in complying with increased regulation.

The client survey indicated that investment banking relationships are surprisingly stable and long

lasting, but pointed to new challenges in the years ahead.

The years since 2008 have provided a recovery period for global investment banks, with a rising

stock market and low interest rates supplying favorable economic conditions. This has allowed

the investment banks to address their own challenges, including lower profitability and higher

capital requirements, and to respond to significant regulatory changes.

During this period, clients have taken new interest in risk management services in all forms,

including reporting, advice, tools and trading, as well as the determination of counterparty safety.

Reflecting this focus on basic offerings, we found that for asset managers, equity trading was the

most frequently used investment banking service; a topic which will be covered in detail in a

separate paper. Services to support trading influenced a choice of bank, and enhanced services

could attract a premium. The next most frequent answer was equity research, although there is

clearly a difference between ‘use’ and be ‘willing to pay a premium to receive’. Next comes a

series of straight forward banking services, lending, advisory, foreign exchange debt and treasury

operations.

Using an investment bank strong in debt or equity issuance is only important to 40% of the

asset/fund manager respondents. However, on a day-to-day basis, new issues are not necessarily

key to their selection of an investment bank.

For corporate clients, of course, products such as equity and debt issuance, M&A, trade finance,

and corporate treasury are highly used.

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The findings also reflect clients' more conservative approach to assets in custody, including their

desire to protect unencumbered trading assets and increased scrutiny of pledged collateral. It is

worth noting that, during this period, strong market returns may to some extent have masked

investors’ usual primary demands for lower costs and higher returns.

Criteria for Choosing an Investment Bank

Price remains an important consideration for clients choosing an investment bank. However,

many other factors - including the research provided, the ability to tailor appropriate financial

options, and especially provision of effective execution capabilities - also rank highly as

decisionmaking criteria.

‘Research provided’ is the second most common criterion listed for investment banking

selection. Although many banks have been paring down their research departments over the past

few years, research remains a high-visibility core service, even if it is an area where clients are

mostly unwilling to pay a large premium for better service.

Basic offerings and premium services

Survey respondents were asked to indicate which services they would be willing to pay a

premium to receive, and which services they saw as an integral part of a basic offering.

Risk management services were clearly the most valued services on offer, cited by 72 percent of

fund manager respondents. This was followed by a group of trading related services, including

the ability to rapidly complete trades (72 percent), execution price (68 percent) and when to trade

(56 percent). Below these trading services were other services such as post trade analytics,

research, and offerings such as regulatory advisory services.

A clear hierarchy of valued services seems to be emerging, starting with risk management and

working down through a range of enhanced trading services. In spite of all the advances made in

trading technology, clients are still willing to pay more to complete trades rapidly. Clients do not

place a premium on processing services, perhaps seeing them as part of the basic package

29

provided by an investment bank. Another important consideration is that investment banking

clients increasingly expect and value cross-product service and coordination.

Access to research and research analysts was mostly seen as a basic service and was very

unlikely to be a catalyst to switch providers. We were surprised at the low value given to access

to senior corporate executives. Many investment banks have long felt this was a particularly

valued service.

Why clients change investment banks

In broad terms, 33 percent of those surveyed have changed their main investment bank in the last

five years. This degree of switching of main accounts is very similar to that seen in U.K. retail

banking, where Accenture’s surveys show that approximately 10 percent of accounts are moved

in a year, and 25 percent are moved every five years.

This degree of switching may appear high, but it does not necessarily reflect a high level of

dissatisfaction among investment banking clients. When asked if they would recommend their

main investment bank to others, 37 percent said they would definitely recommend their main

investment bank and 59 percent said they probably would. The remainder said “don’t know”,

while none of the respondents said they would not recommend their investment bank.

Some of the reasons for changing investment banks were unavoidable, e.g., that the banks have

ceased to exist or have closed down services or offerings in key areas. These reasons, however,

were cited by only 26 percent of those who have changed their main investment bank. Price was

the top consideration, followed closely by the quality of product and quality of service.

Clients' Awareness of Investment Banks' Strategies

We have noted among our own clients that, while investment banks’ clients recognize the

expenses that their investment banks are incurring due to increasing regulation, lower

commissions and spreads are likely here to stay.

Our survey sought to find out where investment banks’ strategies have changed, for whatever

reasons, and how technology is affecting the industry.

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We asked: Are you aware of any changes to the corporate strategy being followed by investment

banks where you have a relationship since 2008 that negatively impact the service offered? For

example, changes in fee structures, reduction of services offered, and a lower volume of

research. Fully 51 percent of respondents said they were not aware, 30 percent said they did not

know, and only 19 percent were aware of such changes.

Of the minority of respondents who noted changes, half of fund managers said that fees for basic

services had risen, half said that investment banks had reduced the amount of research they

produced, and half said that service offerings had been reduced.

Trading

Our survey asked about the number of separate business relationships that a fund maintained

with different groups within an investment bank. While responses varied, a large number of

trading desk relationships are maintained by a substantial number of fund managers, with 30

percent saying they have over 100 different trading desk relationships.

For fund administration and custody, fund managers sought to have a sufficient number of

relationships so as to ensure competitive pricing and to cover any risks of a main supplier failing.

Electronic trading is now the dominant form of trading across most investment classes.

We asked clients how the proportion of electronic trading of a range of instruments had changed

since 2008. These instruments were commoditized (flow) equity derivative, commoditized (flow)

fixed income derivatives, Cash Equity, Cash Fixed Income, Foreign Exchange and Commodities.

In all cases, over half of respondents felt that electronic trading had increased.

We then asked about trading platforms themselves. Here we found opinions divided in roughly

equal proportions over use of an IB-supplied (single-dealer) portal, versus multi-dealer portals.

In all cases but equity derivatives, the plurality of respondents felt that the amount of usage of

the two types of portals was the same.

Implications for Investment Banking Strategy

Over the last five years, investment banks have dealt with decreased revenues through cost

reductions, while maintaining, for the most part, reasonably strong ties to their clients. Over the

next five years, however, this picture could change dramatically due to a number of key factors:

31

Deadlines for new regulatory frameworks, including Dodd-Frank and Basel III, come into play

in the U.S. and Europe, requiring massive expenditures and large allocations of management

time and attention.

Banks' investors are showing impatience with low investment banking returns on equity, at a

time when investment banks need to make large investments to upgrade or replace entrenched

IT systems and operating models.

Market changes, including the entry of specialized players, are sharpening clients’

understanding and demand for better services, lower prices, and more targeted research and

content.

The 's-curve' of digitalization can be expected to steepen, leaving behind players who have not

leveraged digital technologies. To date, clients have not seen much benefit from SMAC

technologies used by their banks, but client sophistication is increasing rapidly and the

pressure on investment banks is building.

To succeed in this environment, investment banks will have to negotiate a challenging landscape.

One important concern for investment banks is that the IT development required to address

regulatory concerns may have ‘crowded out’ other important, forward-looking technology

investment. Clients, for example, value web portals and electronic trading across various

products, but investment banking is lagging behind other industries in integrating electronic

channels. At many investment banks, product systems are older, custom-developed, and focused

on single products, making cross-product development in high-demand areas such as risk or

collateral management complex and expensive.

Controlling costs remains an absolute priority, but so too does finding new areas of growth.

Discerning where clients seek value, what services they expect as a matter of course, and what

services and products they are willing to pay extra to receive, can give investment banks

important insights in their strategic decision making – a topic we look into in more depth in our

Top 10 Challenges for Investment Banks 2014 program (www.accenture.com/10challenges).

Methodology

This survey was conducted in July and August 2013 through telephone interviews with senior

users of investment banking services: fund managers, asset managers, pension funds, hedge

funds and non-financial corporations. A total of 100 respondents were interviewed, 50 in the UK

32

and 50 in the US, equally divided between fund managers and non-financial corporates. The

responding sample is not weighted in any way.

Investment Banking

33

Raising Funds by using the Investment Markets

Investment banks are banks, or divisions of banks, that help businesses or governments raise

money by using the investment markets. 

When an institution needs to raise money by issuing stocks or bonds, then an investment bank

will advise them and help them through the process. They will also underwrite and distribute

(find buyers for) the issue. 

Investment banks also help companies that want to merge or takeover another business. They sell

securities to investors and may also provide a wide range of other services such as asset

management (managing a client's investments) and private wealth management (customised

investment and financial planning for wealthy clients).

 

Investment banks help companies, governments

and other public institutions use the investment

markets, to raise capital needed for new projects

and ongoing operations, by issuing or trading

securities (shares and bonds).

Investment banks deal mainly with large

organisations, other investment banks and

institutional investors. They do not deal with the

general public. They tend to be found in large

cities such as London and New York.

When these clients need to raise money (capital),

they can hire an investment bank to advise them.

The bank will determine the amount of funding

required and how this is structured, i.e. how

much equity (shares) or debt (bonds).

 Role of Investment Banks in Trading

One of a large investment bank's primary

functions is the buying and selling of

financial products.

Investment banks are involved in trading

in two main ways. Firstly in proprietary

trading, that is trading on the bank's own

behalf, putting the banks own capital at

risk in doing so; and, secondly, by

trading on behalf of its clients.

Traders in investment banks aim to make

money on each trade. They do this by

buying securities and other financial

instruments at a lower price than the

34

 Investment banks advise companies when they

want to raise capital by floating the company on

the stock exchange (known as an Inital Public

Offering). They determine the number and value

of the shares to be issued and distribute and time

the release of this new stock.

Investment banks will also assist companies with

secondary share issues and help companies,

governments and other public institutions to raise

capital by issuing debt (bonds); they will help

with distributing the new securities, usually to

other banks and institutional investors.

Investment banks not only help with the issuing

of shares and bonds but also will underwrite the

new securities issued by their clients, for a fee:

that means they agree to purchase the securities if

they fail to sell. For very large issues, several

investment banks may work together, with one

being the lead underwriter.

Some investment banks are also involved in

private equity. This is finding buyers for private

share offerings. Companies that are in private

ownership, i.e. are not floated on the stock

exchange, may wish to raise capital to expand or

even to take a public company, or part of it, back

into private ownership.

Other key areas which investment banks

undertake are mergers and acquisitions (M&A).

They are involved in setting up deals and

price at which they sell them to

investors, or by selling them to investors

at a higher price than they buy them

back. This way they can make money in

both rising or falling markets. Being

prepared to both buy and sell a particular

security is known as market making.

Proprietary trading is performed by a

special set of traders who do not

interface with clients. If a trader gets it

wrong, they could lose vast amounts of

money, but if it goes well, they can make

huge amounts of money.

The risk department of an investment

bank considers the risks traders are

taking and external regulators set risk

limits against the capital that the bank

holds. 

Investment banks also advise clients

about buying stocks, bonds and other

securities. Sales staff will call on

institutional investors, corporations and

wealthy investors to suggest trading

ideas and take orders. These are then

passed to the trading desk which will

price the requirements and make the

trades. Where appropriate, they will also

structure new products that fit a specific

35

advising the world's largest organisations when

they want to merge or take over another business.

M&A is an important source of income for many

investment banks. Even in a recession, strategic

mergers continue to happen and banks that

specialise in M&A continue to do deals, although

at a lower volume.

In recent years, investment banks have also been

increasingly involved in management buy-outs.

When these require a high level of borrowing,

they are known as leverage buy-outs (LBOs).

The banks will advise on the process and help

with raising the funding, sometimes even taking

their own investment stake (known as merchant

banking).

Investment banks also trade stocks, bonds,

derivatives (futures and options) and currencies

with commercial banks and large institutional

investors, on the secondary markets. They make

money by buying securities and other

commodities as cheaply as possible and then

selling them on for as much money as possible.

Investment banks also advise clients about

buying stocks, bonds and other securities. For

larger clients, they will also manage their

investments and invest on their behalf. This is

known as asset management.

Investment banks make their money by charging

fees for their advice and by trading securities and

need.

Another service a bank offers for larger

investors is 'asset management'. This is

when a bank manages a client's

investments and invests on their behalf.

Asset management gives clients access

to a wider range of product offerings

than would be available to the average

investor.

Investment banks have created a broad

array of investment products to go along

with traditional stocks and bonds. They

use derivatives (futures and options) to

create complex structured products

which usually offer much greater

margins and returns than the underlying

securities.

Although investment banks do not

normally deal with individuals, they may

offer financial planning and investment

advice for individuals with high net

worth (those whose liquid assets are over

$1 billion).

The more money a person has, the more

work it takes to maintain and preserve

those assets. These high net worth

individuals have a lot in common with

36

other financial instruments.  

 

institutional investors. Because of their

wealth, they have the means to access a

larger variety of conventional and

alternative investments than normal

investors.

Services are customised for the

individuals and, typically, include advice

for trusts, real estate and businesses, as

well as general stock investing. This is

known as private wealth management.

5 Technology Challenges for Investment Banks in 2014

The most important things clients should be thinking about, and the challenges in bringing

them to the forefront.

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In the opinion of Jonathan Firester, managing director of capital markets atAccenture, if you look

broadly at the financial landscape we are in the latter years of a series of transformations that

started after the '08 crisis.

"If you think of all forces that occurred and we've been responding to, there were regulatory

forces, changes in customer behavior, and changes in their financials which cause them to look

into various portions of an expense base to cut costs and to improve profitability and ROE… If

we look at the top 10 challenges they face now, you're looking at the later changes of that

transformation."

It is easy to get lost in every day work, clients worry about this too, he adds. "We want to help

clients think about and prioritize issues, to focus and aggregate all the honking of all experts who

are all having different experiences across industries and functions in technology."

A complete list of the top 10 challenges facing investment banks can be found here, those most

relevant to technology in financial markets are detailed here.

1) Restructuring the Investment Bank: Streamlining and Rationalizing

It is no longer an arms race to create more innovative and complex derivatives, instead banks are

pulling back to streamline flow of products, and looking to their technology platforms for

answers. Focus is on removing the expense and complexity of long entrenched technology

platforms, and in many places replacing complex custom platforms with combinations of off-the-

shelf packages with fewer and more focused pieces of customization.

The potential expense savings here are pretty extraordinary, says Firester. "I think it's the most

important technology discussion, but also the most difficult." They are big and lengthy, results

aren't immediate, but can mean the difference between successful or unsuccessful products

ROEs.

2) Watching Closely: Improving Surveillance and Mitigating Conduct Risk

Regulators have become very thorough in terms of monitoring, measuring and mitigating all

different kinds of risk, and the public eye still looks towards investment banks with skepticism.

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Therefore a huge amount of attention internally and externally has been placed on the technology

tools clients are using to look for and predict risk events.

Using more data across products and functions than in the past enables risk measurement and

risk management tools to produce more information about levels of potential risk begin taken,

explains Firester. "Every risk manager is looking to move from measuring to predicting risk, so

there is a lot of technology related to that measuring and monitoring. Even just aggregating risk

management across products is a complex undertaking from a product overview."

Management has made it clear that surveillance and risk management are responsibility of the

business themselves. It's no longer a tension between line managers pushing for profits and

compliance department pushing back against them to make sure nothing risky was happening,

They now accept risk management is important across the line, they can't have a strategy that

involves taking inappropriate risk.

3) Rethinking The Digital Proposition: Providing Information Clients Really Need

Technology has created disruptions in other industries, but none like the investment banking

sector. The very economics of exchanges have changed, leading to some interesting

conversations with clients about which major disruptions they can prepare for.

"These are disruptive technologies that enable strategic differentiation," explains Firester. This

includes taking advantage of multi channel relationships with clients, cross selling products and

maximizing client interaction with their portal by providing more content to those who need it

most.

4) A New Ecosystem: Using Utilities to Share the Load

Do not focus on commoditized parts of your business that provide no differentiation in the

market. Instead, different software packages and a utility based model helps banks get to the next

level without revamping IT systems or great expenditures on compliance.

In financial services there is a long history of customized products. There was a time when that

flexibility was worth it and there were profit margins to support it, explains Firester. "Now you

don't have to do everything in house, many components are similar across competitors."

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Settlement, creating regulation reports, tracking reference data, are examples of services that

may be more effective as industry utilities. "It just doesn't makes sense for clients to invest

internal resources on parts of a business that doesn't differentiate themselves from competitors…

Clearning and settlement was something you had to do right, but rarely an area of competitive

advantage. So it's a natural thing to outsource, especially where costs go down with scale."

5) Sustainable Funding: Managing Collateral & Liquidity

Firms are investing their development dollars on cross product systems, trying to lower historical

cost of complexity and of custom systems. "Because this global cross product integrated

management of collateral and liquidity is so important, in the sense that balance sheet and

collateral has become the focus of a bank, optimizing it has become critically important from a

risk management point of view," says Firester.

It requires linking together all systems that manage and transact collateral across different

products, and it is a huge tech investment, requires integrating systems of data across products

and regions. "Integrating all sources and uses of collateral, understanding where is it coming

from and where to post collateral, that's an important set of technology investments.

HISTORY OF INVESTMENT BANKING

Investment banks perform two basic, critical functions. First, investment banks act as

intermediaries between those entities that demand capital (e.g. corporations) and those that

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supply it (e.g. investors).  This is mainly facilitated through debt and equity offerings by

companies.  Second, investment banks advise corporations on mergers, acquisitions,

restructurings, and other major corporate actions. While the majority of investment banks

perform these two functions, it is important to know which products and services each bank

specializes in.

INVESTMENT BANKING VS. COMMERCIAL BANKING

One distinction that is important to understand is the fundamental difference between an

“investment bank” and a “commercial bank.”  Investment banks perform advisory services and

securities underwriting, while commercial banks manage deposit accounts, such as checking and

savings, for individuals and businesses (but primarily for businesses—similar transaction

accounts for individuals are often handled by a retail bank). This distinction is important to

understand, because the U.S. enacted the Glass-Steagall Act in 1933 in response to the Stock

Market Crash of 1929 and the Great Depression. The Glass-Steagall Act essentially prohibited

banks from performing both “investment banking” and “commercial banking” activities within

the same entity. This was done in order to prevent banks from making implicit bets on the

direction of the market, at the potential expense of depositors. Banks were forced to choose

between investment banking and commercial banking, and that continued until the Glass-

Steagall Act was repealed in 1999.

GLOBAL ECONOMIC CRISIS

After the Glass-Steagall Act repeal, investment banks started to participate in both investment

and commercial banking activities, and thereby take on a considerable amount of risk (on behalf

of both the bank and its clients).  This high level of risk-taking, combined with high leverage, led

to several major investment banks failing during the global economic meltdown in 2008.  Huge

losses were recorded and the remaining major investment banks were forced to either change

their business models or consolidate with other banks in an industry-wide effort to reduce

leverage ratios and stabilize the banking system.

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CORE ACTIVITIES AT INVESTMENT BANKS

1. Corporate Finance (this function is most commonly referred to as “Investment Banking”):

Assist corporations in raising capital through debt and equity capital markets, and provide

advisory services on mergers and acquisitions (M&A) and other corporate transactions.

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2. Sales and Trading: Buy and sell securities and other financial instruments as an intermediary on

behalf of its clients.

3. Research: Provide detailed company and industry research reports and make recommendations

on whether to buy, sell, or hold public securities.

4. Asset Management: Provide equity, fixed income, money market, and alternative investment

products and services to individual and institutional clients.

CORPORATE FINANCE/INVESTMENT BANKING GROUP STRUCTURE

Corporate Finance is broken down into several types of groups, but the primary distinction is

between Product groups and Industry/Coverage groups. Each group handles its own client

accounts, and is responsible for a designated product or industry sector.

Product groups: Differentiated by what types of services the groups provide. Typical groups

include Mergers and Acquisitions (M&A), Leveraged Finance (Lev Fin), Equity Capital Markets

(ECM), Debt Capital Markets (DCM) and Restructuring. These groups focus only on their

specific products and can work across all industry groups.

Industry/Coverage groups: Differentiated by what types of clients the groups serve. Typical

groups include Healthcare, Technology, Media, Telecom (TMT), Financial Institutions Group

(FIG), Natural Resources, Consumer & Retail (C&R), Industrials, Real Estate, Gaming and

Lodging, and Financial Sponsors.  Industry groups cover all companies in a specified industry,

but have exposure to a variety of products including debt, equity, and M&A. Financial Sponsors

is a unique coverage group as it does not cover a specified industry but instead serves only

Private Equity firms. Private Equity firms may own multiple “portfolio” companies across a

variety of industries, and have a series of unique investment banking needs.

An analyst’s experience in a certain group can vary widely depending on the investment bank

and group, as each bank has its own strengths and weaknesses across groups relative to its peers.

For example, Goldman Sachs does not have a standard Mergers and Acquisitions (M&A) group,

while Morgan Stanley relies significantly on its M&A group for deal execution and less on its

Industry/Coverage groups for deal execution.

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INVESTMENT BANKING HIERARCHY

The investment banking seniority structure/hierarchy is very strict. A typical hierarchy includes

(from most Junior to most Senior): Analyst, Associate, Vice President, Director, and Managing

Director. Analysts will tend to work almost exclusively with an Associate, and the Analyst-

Associate pair will be responsible for the majority of deliverables in a typical client engagement.

Investment banking deals are done in small teams of 4-6 bankers who usually work with one

analyst, one associate, one vice president, possibly a director, and the lead managing director on

the deal. Work flow will be executed from the bottom-up: analysts create the material, which is

quickly approved up the team hierarchy, to the managing director on the deal. The managing

director will have final say on all deal material before it is shown to the client (the company that

the bank is representing on the deal).  It is very common for deal teams to consist of bankers

from across Product or Coverage groups depending on the type of deal or engagement.

How investment banks make their money

The first thing to note is that investment banks are very different to high street banks (or ‘retail’

banks). Retail banks typically take deposits from savers and lend them out to borrowers in the

form of loans, mortgages and credit cards. They make most of their money by charging a higher

rate of interest to borrowers than they pay to savers.

Investment banks, on the other hand, make their money by selling services to customers such as

companies, governments and investment funds (fund managers and hedge funds). They are

usually paid for these services through fees and commissions rather than interest payments.

What investment banks do

So what services do investment banks sell? There are four main types:

Advice

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Corporate financiers and corporate brokers provide various types of advice to companies. They

might advise a company on how to float on the stock exchange, or on how to pay less tax, or on

potential merger targets, for example. 

Financing

Investment bankers can also arrange financing for companies. Through their relationships with

big investment funds, they can help obtain equity financing (by issuing shares) or debt financing

(by issuing corporate bonds), as well as bank loans.

Trading

This is the much-criticised ‘casino’ bit of the investment bank. Historically, investment banks

have employed large numbers of traders to trade everything from shares to currencies to

derivatives. They can do this on the behalf of clients, or on their own behalf (known as

proprietary, or ‘prop’ trading).

Research

Analysts spend their time researching companies and industries. The sales teams then sell this

knowledge to fund managers and hedge funds.

Where does all the money come from?

All of these functions rely on each other at some point. For example, if you have a top-rated team

of research analysts, backed by the ability to trade lots of different assets, then you’ll be able to

win business from the big investment funds.

Do we need investment banks?

While investment banks have deservedly gained bad publicity for their reckless trading and

financing activities, they do provide a useful role in that they help in the allocation of money

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from investors to companies in an economy, which hopefully ends up creating the wealth and

jobs that we all depend on.

However, they are likely to get smaller, and to employ fewer people. Governments and

regulators are pushing banks to hold more money to protect against losses, and to stop trading on

their own accounts. On top of that, credit is tighter.

This almost certainly means that the days of investment banks being able to make huge profits by

trading with large amounts of borrowed money against the backdrop of a very forgiving bull

market are over. That also means that rewards for employees will shrink, along with profits for

shareholders.

The end result is that we are likely to see smaller investment banks, focusing on advisory roles,

and employing a lot fewer staff on lower salaries and bonuses. Few outside the investment

banking industry will be sad about that.

Investment vs Merchant Banking 

Bank is an organization that provides a range of financial and some non financial services to its

customers. The main source of income, that makes the bank survive is the interest charged from

those to whom the bank has given loan. A bank accepts deposits from its customers and pay

interest to that deposited money, while it lends money to those who need finance and charge

interest from them. The interest rate chargeable from the borrowers is higher than the interest

rate payable to depositors. This is how a bank, which is traditionally known to normal people,

earns revenue. Banks can be brodly categorized as retail banks and investment banks. The above

mentioned revenue generating procedure is more applicable to a retail bank. The revenue models

of investment and merchant banks are different, which we will discuss in this article.

Investment Banking

An investment bank is a financial institution that engages in the issuance of securities on behalf

of its client. Investment banks are the banks, which facilitate both the investor, who is in search

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for good investment opportunity and the investee, who is searching for capital to invest in viable

projects. Unlike other types of banks, investment banks are not accepting deposits from

customers; that is, investment banks do not provide regular banking services to the general

public. The main Investment banking activities are issuance of securities, underwriting of

securities, providing financial related consultancy services to companies, assisting companies in

the acquisition and mergers, and similar services.

JP Morgan, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, and Credit

Suisse are some of the world renown investment banks.

Merchant Banking

Merchant bank is a bank that mainly deals with international financial activities such as foreign

real estate investment and long term company loans. Merchant banks do not provide regular

banking services to the general public. Nowadays, merchant banks provide underwriting services

and consultancy services for wealthy institutions, as well as individuals. Issuance of letter of

credit, international fund transfer, foreign corporate investment and foreign real estate

investment are some examples of services offered by a merchant bank. Merchant banks offer

capital in exchange for share ownership. The main sources of income of a merchant bank are fee

for the consultancy that they provided and interest for the capital provided. Some of the financial

institutions mentioned above (e.g: JP morgan) have begun as merchant banks.

Bibliography

Investment banking

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Types of banking services

Wibliography

www.wikipedia.com

www.encyclopedia.com

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