SYNOPSIS: Investment Banking

THE BUSINESS

Investment banking is a specialized division of banking that assists individuals, corporations, and governments in raising capital by underwriting or acting as the intermediary in the issuance of securities. Investment banks also provide a wide range of financial services such as mergers and acquisitions (M&A) advisory, corporate restructuring, asset management, trading of derivatives and equities, and other financial advisory services.

Principal functions of investment banks include:

Underwriting: Investment banks help companies issue new securities, such as stocks or bonds, by purchasing them from the issuer and then selling them to investors. This process involves assessing the risk and determining the price at which the securities will be offered to the public. For example, an IPO, although most underwritings are not the initial offering.

Mergers and Acquisitions (M&A): Investment banks advise companies on buying, selling, or merging with other companies. They help clients evaluate potential targets, negotiate deals, and structure transactions to achieve strategic goals.

Corporate Finance: Investment banks provide advice on capital raising strategies, such as issuing stocks or bonds, to finance growth initiatives, acquisitions, or other corporate activities.

Trading and Sales: Investment banks facilitate trading of various financial instruments, including stocks, bonds, currencies, commodities, and derivatives. They also provide sales services to institutional clients, such as hedge funds, pension funds, and mutual funds.

Research: Investment banks conduct financial research and analysis to provide insights and recommendations to clients and investors. This includes industry research, company analysis, and market forecasts.

To conclude, investment banking enables global and interstate commerce by providing capital to businesses, facilitating corporate finance transactions, and effecting market liquidity.

THE LEGAL STRUCTURE

In recent history, investment banks operate as broker-dealers registered pursuant to The 1934 Exchange Act or as bank holding companies under The Bank Holding Company Act. This bifurcation resulted from The Glass-Steagall Act, and prior to its adoption, commercial banking and investment banking were not separately regulated businesses. By the turn of the century, large conglomerates were experimentally voluntarily regulated as Consolidated Supervised Entities which was a program managed by the Division of Trading and Markets at the U.S. Securities and Exchange Commission through the end of the financial crisis of 2007-08. Release No. 34-49830.  Subsequently The Dodd-Frank Wall Street Reform and Consumer Protection Act was adopted, and the biggest investment banks that were not already regulated under the BHCA were granted banking licenses in connection with the crisis. 

To conclude, most investment banks still operate under the original 1934 Act broker-dealer regulation or via a bank charter pursuant to The Bank Holding Company Act.

Compare with Commercial Finance.

See also A Rolodex, History of Banking Regulation, and Anti-trust Compliance Measures.