Understanding Investment Banking

Hi All,

A lot of students come to us for understanding what is  Investment Banking and what Investment bankers do in their role.

Let’s Understand Banking first:

The word bank gets its origin from the Italian word “Banko”– meaning “bench covered with a green tablecloth”.

Traditionally banks use to give and take money ( Landing & Deposit ) and the difference between the two was the amount bank used to pay the admin cost and taking the loan loss. In today’s scenario, you would have heard the phrase ” CASA is the bread and butter of bank” indicating the role bank traditionally had.

Banking Division Traditionally :

1. Commercial Bank’s: Included in pure banking activities ( Landing & Deposits)

2. Investment Banking: are mainly concerned with raising capital for the corporates and governments ( At times for Super HNI). They assist companies to take corporate actions like Mergers & Acquisitions, Spin-Off, and Split-Off. They take a lot of leverage to do the business.

In the USA the Glass-Stegall Act (1993) started to limit the ability of Investment banks and Commercial banks to engage in Each Other Activities. This act separated the activities of Commercial and Investment Banking.

Then came the US Sub Prime Crisis and that led to a fall in stock markets across the globe. Before the crisis, there were 5 established “Big” Investment Banks in the USA namely

         1. Lehman Brothers

         2. Bears Stearns

         3. Merrill Lynch

         4. Goldman Sachs

          5. Morgan Stanly

The US Subprime crisis led to the complete downfall of Independent Investment Banking in the USA. All the banks came under the Bank Holding Company. As all the Investment Banks were heavily leveraged the crisis lead to the downfall of all of them (Read Other posts of US Sub Prime Crisis to Understand the same.

Investment Banks	Status After 2007 Crisis
Lehman Brothers	Bankrupt
Bears Stearns	Taken Over By JP Morgan Chase
Merrill Lynch	Taken By Bank Of America
Goldman Sachs	Became Bank Holding Company
Morgan Stanly	Became Bank Holding Company

As of now the Investment Banks are part of Bank Holding Company and are a separate arm of the Bank. They have complete freedom to Underwrite securities and do corporate actions.