Investment banking is an exclusive banking sector which is specifically related to creating capital for companies, governments, and other business entities.
The concept of banking has several uses. One of them refers to all banking sectors and bankers. The bank, therefore, can refer to the entities that are dedicated to facilitating financing.
On the other hand, it is an economic concept linked to the placement of capital to achieve a future profit. This means that the investor resigns an immediate benefit for a future one that is unlikely, but in principle, should be greater than the current one.
The investment includes three main variables:
The expected return (how much money is expected to be earned), the risk (how likely it is to obtain the expected profit), and the time (when that profit would be achieved).
- Entities are specialized in obtaining money or other financial resources for private companies or governments to make investments are known as investment banking or business banking. The investment banking obtains these financial instruments through the issuance and commercialization of securities in the capital markets.
It is common for an investment bank to also offer consulting services for the development of acquisitions, mergers, or divisions.
- The regulations for the operation of investment banking vary by country. In general, the authorities usually grant special licenses for these types of banks, without being able to operate simultaneously as commercial banks. Investment banking, therefore, cannot capture deposits.
- The financial hardship that broke out in the AMERICA (US) in 2008 was mainly caused by the bankruptcy of many investment banks, such as Lehman Brothers.
Differences between investment banking and commercial banking
Commercial and investment banks have many more differences than are generally perceived;
These are two well-defined types of business.
- Commercial banking is mainly perceived by the general public, since it has a large number of branches, available to everyone. The business that characterizes it is the payment for the deposits of its clients. And the collection for the credits granted to them, having as the main objective that the difference between said payments is always positive. On the other side, it is also dedicated to granting credit cards and carrying out operations. Such as processing of guarantees, transfers, a brokerage in the stock market, pension plans, and investment funds.
- Among the activities of investment banking is the sale of complete divisions between companies, the issuance of bonds, mergers, the taking of companies on the stock market, the design and execution of the public acquisition offer (OPA) and the trading operations in Large-scale financial markets It is worth mentioning that, unlike the previous one, it does not have many small branches, but a few of considerable dimensions.
The benefits are also a point that distinguishes them. Those of commercial banks have high stability since very rarely it enters losses. For the commercial banking of a given country to lose money in most of its operations. Said territory must be in a crisis of absolute emergency.
Investment banking, meanwhile, has much less stable benefits to put this difference in perspective. During the good times of the economy, its profits are much higher than those of commercial banks. But this situation is reversed considerably in times of deceleration, to the point of causing sharp falls and losses. The latter, it should be noted, is not indicative of the economic health at a general level of a country. But is about normal phenomena throughout the life cycle of investment banking.