An investment bank is a financial institution specialized in attracting funds from institutional investors and large funds so that individuals, companies, or governments can obtain financing for their projects.
Therefore, we are dealing with an intermediary between someone who needs money for a project and someone who would be interested in investing in it. In addition, he also acts as an advisor throughout the capital-raising process.
For example, as entrepreneurs, we need money and want to contact investors. This bank helps us find them, shows us the way forward, and is responsible for contacting them and getting the funds.
History of investment banking
The history of this type of entity goes hand in hand with economic development and its consequences. In ancient Rome, different people gathered to contribute capital to various projects. The goal was to make a profit on the purchase of food or production inputs.
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The first bank-managed public credit with a land acquisition goal appeared in Italy in the Middle Ages. For their part, in the 17th century, the newly created European states began to issue debt and trade with it to obtain financing.
In the 18th and 19th centuries, thanks to mercantilism, this operation saw great growth, focusing on financing governments. In addition, due to the economic crisis of 1929, these entities grew exponentially, creating a new way of banking.
During the 20th century, they became sophisticated, and their complexity increased, which continued more strongly in the 21st century. The 2008 crisis led some of these entities to bankruptcy, especially in the United States.
All this generated in society an increasing distrust of the banking system. Something that led to greater regulation of this market and the creation of strict operating rules. These, above all, focused on the protection of the plaintiff.
Conditions for its existence
An investment bank, like any company, thoroughly studies the country where it will settle. We are talking about investors who need to know that their money is safe. The most relevant conditions are the following:
- First of all, look for stability. For this reason, it will be implemented in countries that offer it, and people will flee from those where it does not exist.
- In addition, it needs legislation favorable to investment. That is, guarantees, security, and incentives are offered, among other factors.
- From a macroeconomic point of view, you will look for competitive advantages in the sector. Therefore, it will focus on business opportunities to invest in.
Services of an investment bank
This type of entity offers a series of services to its customers:
- Plaintiff. From this perspective, they can act as intermediaries in the stock market (market making) or carry out underwriting operations, that is pre-financing contracts for securities or securities of the company.
- Offeror. In this case, it carries out advisory work for large funds and the rest of its clients.
- Commercialization. It is responsible for issuing, purchasing, and selling various investment and savings financial products. Included are those related to the company’s capital, such as stock issues, and others, such as derivatives or cryptocurrencies.
- Investors. These entities can act, in turn, as investors in attractive projects that can become profitable.
- Investment products. In addition, they can create their own investment products for their customers. An example is in the oSICAV variable capital investment companies and various funds.
On the other hand, three levels are distinguished in your organization:
- Back office. His tasks are the management of accounting and the link with other areas.
- Middle Office. Its main task is the risk analysis of customers to decide which operations are accepted and which are not.
- Front Office. They are in charge of sales. Therefore, they communicate directly with the client and, in turn, have an important relationship with the middle office.
Investment banking models can be classified as follows:
- American model. Three significant stages have marked it. In the first, investment operations were allowed in conjunction with commercial ones (s. XIX). In the second, the Glass-Steagal Act separated them (1993), to rejoin in 1999. In the third, through the Gramm-Leach-Bliley Act, they separated again.
- Model of the United Kingdom. It is a model similar to the American one because English bankers initiated that. The Finance Act of 1968 established a regulatory framework for the requirements to carry out this activity. Over time, these measures were hardened, becoming even stricter.
- Model of continental Europe. This model has been under the leadership of Germany and France. Both commercial and investment services are provided jointly and are supervised by the European Central Bank, which is also in charge of monetary policy in the member countries of the European Union (EU).
- Japanese model. In this case, the Prime Minister carries out the tas through the Ministry of Finance supervisory tas. In Japan, banking activities are separated into commercial, investment, and insurance, each with a specific regulation adapted to its circumstances.
- Chinese model. The Chinese model, due to its peculiar one-party political system (the Chinese Communist Party), is based on the intense presence of the state in all activities. This includes investment banks and public and private financial institutions.
Example of investment banking
Let’s look at some examples of banks that offer this type of investment service:
- China Industrial and Commercial Bank Limited (ICBC) It is the largest bank in the world, both in terms of capitalization and deposits as well as profitability. It is part of the big four of China, along with the China Construction Bank, the Agricultural Bank of China, and the Bank of China. All of them are state-owned.
- JP Morgan. It is the largest bank in the United States and one of the most important in the world. It has a relevant free investment fund unit headquartered in New York.
- BBVA. It is a Spanish financial institution and one of the four main banks in the country. It follows the model of continental Europe and offers its customers joint commercial and investment services.
- Nomura Securities. This Japanese entity is a subsidiary of Nomura Holding, and both are part of the Nomura Group. It employs more than 26,000 people and is an example of an investment bank that follows the Japanese model.
As a result of the 2008 financial crisis, some well-known names in investment banking were North Americans. That’s how we have Merrill Lynch, Goldman Sachs, Morgan Stanley, and Lehman Brothers, which disappeared.