The role of financing and investment banking

word cloud - financial market

An investment banking is a division of the bank that brings together all advisory, intermediation and execution activities (initial public offering, debt issuance, merger/acquisition). The main customers are companies, investors and also governments.

investment banking

 

It is possible to establish a classification relating to the different activities, they are generally divided into separate entities. These include Corporate Finance, i.e. corporate finance, and Global Capital Markets and Structured Finance.

Investment banking is sometimes differentiated from investment banking by assigning market activities to the former and corporate finance to the latter. Unlike a deposit bank, the investment bank does not receive deposits from individuals and therefore seeks liquidity from other banks, money markets or the central bank.

It also provides access to capital markets through the issuance of shares and bonds. This distinction comes from the United States, where it was enshrined in the Glass Steagall Act after the 1929 crash. This difference has never really taken root in Europe and most European investment banks are part of banking groups that also have deposit, insurance and other activities.

The Glass Steagall Act was replaced in 1999 by the Gramm Leach Bibley Act, which allows deposit, investment and insurance activities to be integrated into a single entity. Some believe that it is this use that led to the financial crisis related to subprimes.

Investment banking often has an important activity in the structuring of merger and acquisition transactions. The business has diversified considerably, especially since the emergence of the modern financial sphere after 1973, into multiple activities related to financial markets. These with a different degree of importance depending on the institutions that group together:

  • Issuance of securities, e.g. initial public offering of companies, capital increases, takeover bids, takeover bids, takeover bids, merger/acquisition arrangements
  • The organisation of markets in financial instruments, derivative or not
  • Financial engineering (complex operations combining various financial instruments)
  • Equity participation in companies on their behalf or on behalf of others
  • Arranging various financial transactions, including mergers and acquisitions
  • The implementation of large-scale syndicated financing (financing pool), involving many other banks and financial companies.
  • Stock brokerage

It can be said that corporate and investment banking provides sophisticated services to large companies. It offers, among other things, services related to access to equity, bond and interest rate markets (issuance, transaction, hedging), mergers and acquisitions advice, and access to more or less complex bank financing.

Retail banking and investment banking are two separate entities within the banking system. Their mutual roles seem complementary in the financing of the economy even if each one’s profession remains specific. The first can be considered as retail banking, the second is really the one that negotiates financial products and only in relation to other wholesalers.

Indeed, since one is a corollary of the other in assessing the good health of a banking giant, it would be simplistic to think that a good understanding of the financial sphere can be summed up only as that of one of the two parties.

Despite a business based on the same raw material, namely monetary or financial product, these two activities are totally split. Investment banking is largely part of the financial sphere but above all it is a channel for economic stabilisation through monetary policies.

Baptiste GRANDJEAN

BONDS & SHARES

BONDS & SHARES is a participatory non-Profit information platform for, through and by experts in finance and business. For more information please visit www.bonds-and-shares.com


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