Meaning of Investment Banking

Investment Banking

The concept of banking has several uses. One of them refers to all banks and bankers. Banking, therefore, can refer to entities that are dedicated to facilitating financing.

Investment, on the other hand, 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 that, 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 this profit would be achieved).

It is known as investment banking or business banking entities that specialize in obtaining money or other financial resources so that private companies or governments can make investments. These financial instruments are obtained by investment banks through the issuance and sale of securities in the capital markets.

It is common for investment banking 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 them being able to operate simultaneously as commercial banks. Investment banking, therefore, cannot take deposits.

The financial crisis that broke out in the United States in 2008 was generated mainly by the failure of many investment banks, such as Lehman Brothers.

Differences with commercial banking

Short for IBK by AbbreviationFinder, commercial banking and investment banking differ much more than is generally perceived; These are two well-defined types of business.

With regard to image, 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, with the main objective that the difference between said payments is always positive. On the other hand, it is also dedicated to granting credit cards and carrying out operations such as processing guarantees, transfers, brokerage in the stock market, pension plans and investment funds.

Investment banking activities include the sale of complete divisions between companies, the issuance of bonds, mergers, listing companies, the design and execution of a Public Offering of Acquisition (OPA) and trading operations in large-scale financial markets. It should be mentioned that, unlike the previous one, it does not have many small branches, but a few of considerable size.

The benefits are also a point that distinguishes them. Those of the commercial banks present a great stability, since very rarely enter losses. For the commercial banks of a given country to lose money in most of its operations, it is necessary that said territory is in a crisis of absolute emergency.

Investment banking, meanwhile, has much less stable returns. To put this difference in perspective, during good times in the economy, its profits are much higher than those of commercial banks, but this situation reverses considerably in times of slowdown, to the point of causing sharp drops and losses. The latter, it should be noted, is not an indication of the general economic health of a country, but rather normal phenomena throughout the life cycle of investment banking.

Investment Banking