What is Investment Banking?

Investment banks, as opposed to what are called retail banks or commercial banks, are financial entities which focus their efforts on capital market activities such as issuing securities or bonds, or providing advice for transactions such as company mergers and acquisitions. They are often distinct entities from a retail bank, which is what we, as individual consumers, normally would just call a “bank.” Basically, a retail bank is an entity that 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 what we might call “Wall Street” banks that deal with larger capital investments on behalf of investors, or organize aggregates of capital such as pension funds or hedge funds.

After the Great Depression, Congress ruled that retail banks should only engage in banking activities with customers, to distinguish them from investment banks, which engaged in capital market activities. This separation of activity is no longer mandatory, but the distinction of terms still exists.

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.

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 September 22, 2008, in the wake of the U.S. financial crisis.