What are Investment Banks?

Unlike a retail bank, which deals directly with individual customers and provides a standard range of services such as checking accounts, savings accounts, certificates of deposit and the like, investment banks are financial entities which focus their practice on capital market activities such as issuing securities or bonds, providing advice for company mergers and acquisitions, or serving as a financial intermediary between issuers of securities and investors. An investment bank may perform a variety of services for investors, including underwriting, facilitating corporate reorganizations, or acting as a broker for institutional clients.

After the stock market crash of 1929 and the Great Depression, Congress passed the Glass-Steagall Act, which required that commercial banks engage only in banking activities such as accepting deposits, making loans, and other fee based services, and simultaneously limited capital market activities to separate entities known as investment banks. These days, this separation is no longer mandatory. However, the distinction of terms still exists and there are many financial entities that serve purely as investment banks, dealing exclusively with investors and activities in the capital market.

Investment banks raise money by issuing and selling securities in the capital markets (either equity or bond), as well as serving in an advisory capacity on mergers and acquisitions. To perform these services legally in the US, any advisory entity must be licensed under the SEC (FINRA) regulation.

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Up until recently, the largest investment banks in the US were collectively referred to as the “bulge bracket” and were ranked according to profitability by several indices. The most recent round of Wall Street takeovers thinned the ranks of the “bulge bracket” considerably. The last two of the major independent bulge bracket firms, Goldman Sachs and Morgan Stanley, elected to convert to traditional banking institutions on Sept. 22, 2008, in the wake of the U.S. financial crisis.

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