In some ways it is easier to explain what does not happen inside an investment bank these days than what does. For example, an investment bank will not operate a massmarket retail banking operation, which demands a completely different skill set. If an investment bank is a subsidiary of a large universal bank then retail banking will be located elsewhere in the group. On the other hand the investment banking operation
will handle activities in the international wholesale capital markets and will also house the corporate advisory function. Typically it will also embrace participation in the new issues markets, securities research, securities trading and sales, links with institutional investors, expertise in derivatives and the ability to structure complex new financial products and to manage the risk on such products.
There is a more detailed list set out below of the activities that are typically carried out in an investment banking business, with a very brief description of what happens in each business area. Some large banking groups have also folded into their investment banking division the part of the operation that makes loans to major corporate clients. There is a view that large clients expect their relationship bank to ‘put its balance sheet
at their disposal’and that corporate lending, while not in itself highly profitable, will lead to lucrative investment banking mandates.
Corporate Finance or Advisory
- Advising corporates on mergers, takeovers and acquisitions.
- Advice on strategic and financial restructuring.
- Advising governments on the privatization of state assets.
Debt Markets
Foreign exchange: research, trading, sales.
Government bonds: research, trading, sales.
Debt capital markets: managing new bond issues and underwriting issues for corporate and sovereign borrowers often operating as a member of a syndicate of banks.
Corporate and emerging markets bonds: sales, trading, credit research (researching into the risk of changes in the credit quality of the bonds, which will affect their value).
Credit derivatives (products that manage and re-distribute credit risk): research, trading and sales.
‘Flow’derivative products (standardized derivative products dealt in volume): research, trading, sales.
Structured derivatives products (complex structures often devised with the needs of specific clients in mind).
Equity Capital Market
Advising companies on initial public offerings of shares or subsequent offerings such as rights issues and private placements.
Underwriting and syndicating new equity issues.
Equity Market
Cash equities: research analysis, trading (market making), sales to institutionalinvestors.
Equity derivatives: equity swaps, options and structured products. Trading, sales, research. Clients will include institutional investors and corporations.
An investment banking business or subsidiary may also include:
- a custody business which holds securities on behalf of clients and manages cash;
- a private banking operation aimed at high net-worth individuals;
- an asset management business;
- a retail broking business which provides stockbroking services for private individuals rather than institutions;
- a private equity business which invests the bank’s own capital and that of its clients in the shares of unlisted companies and companies listed on smaller stockmarkets.
It will include:
- operational staff who settle trades and handle payments (the so-called ‘back office’);
- risk management specialists and auditors and middle-office staff who monitor and measure risks and exposures and profits;
- information technology professionals who develop and manage the bank’s computer systems;
- human resources and other support functions.
Read More : Modern Investment Banking
