Unlike conventional commercial banks, whose goal is to attract clients’ funds and put them into circulation, investment banks are looking for investment deals to act as an intermediary in them and receive a commission. So, how does the bank work, and what are the best investment banks?
What is an investment bank?
An investment bank is an organization that specializes in fund transactions. They were separated from traditional banks in 1933 in the United States when a ban was imposed on combining activities in the securities market with attracting and placing deposits to protect depositors.
Having passed a rather long way of formation, investment banks only in the second half of the twentieth century became able to exert a significant influence on the global financial market and demonstrate wide opportunities for accumulating and distributing free capital among its end users.
Investment banks are an integral part of securitized credit systems (the Anglo-American model) based on stock market institutions and instruments, in which the main form of attracting resources is the issue of shares and the placement of debt obligations.
One of the prerequisites for the development of this model is the activity of international financial and credit institutions. Strengthening financial globalization, the rapid growth and deregulation of financial markets, the rapid development of new banking technologies and financial instruments, the large-scale movement of both direct and portfolio investments have led to the development of financial institutions specializing in investment operations.
Investment banks as financial intermediaries are called upon to perform several functions at once:
- reducing risk by diversifying it;
- reduction of distribution costs;
- regulation of financial market segments;
- creation of information market space.
The significant feature of investment banks is that (unlike securities brokers and dealers) the income they receive (a fixed percentage of transactions) is set by their clients themselves, which is preferable to receiving commissions from trading with securities.
Common investment banking concepts
The importance of specialized banks in the investment sector has recently increased. The typical activity of an investment bank is a combination of underwriting services, mergers and acquisitions services, advisory services to corporate clients and governments, brokerage services, customer lending, and settlement operations. The scale of underwriting and M&A services directly depends on the number and volume of IPOs, the willingness of issuers to enter the primary market with new issues, and surges in the M&A market.
The participation of investment banks in financing investments in different countries is not the same and is carried out taking into account the specifics of the organizational structure of these banks.
The list of the best world investment banks includes:
- Wells Fargo & Company
- Rothschild & Co.
- Houlihan Lokey
- Morgan Stanley
- RBC Capital Markets
- Greenhill & Co.
- BMO Capital Markets
- Piper Jaffray
- BNP Paribas USA
- Qatalyst Partners
As a result of increased competition over the past decades, the cost of intermediary services has significantly decreased, especially the size of commissions, which has created the prerequisites for the emergence of an interesting trend: investment banks began to compete not only with their traditional rivals – commercial banks but also with their clients. Large clients, such as investment funds, prefer to hire their analysts and traders, and the development of electronic communications allows you to make transactions without the participation of intermediaries.
These trends have prompted investment banks to restructure their business, use cross-subsidizing mechanisms for different types of activities, further expansion in the securities markets of developing countries, and the development of integrated services.