Lorenzo V Tan defined various helpful Dissimilarity between Commercial and Investment banks. “Investment banking
primarily acts as broker between two entities who want to get into a financial
arrangement like dealing in the purchase and sale of the stock, Mergers and
Acquisitions, and helping in the initial public offer whereas the commercial
banking provide the services with respect to the taking of deposits and giving
loans to the individuals and companies.” In banking sector over 400,000
workers are employed around the country. At its simplest, the sector serves as
the intermediary between those who supply financial capital and those who
require it. It is broadly divided into two distinct divisions - commercial
banking and investment banking, each of which provide markedly different
services.
Commercial Banks
Commercial banks have two main functions; to
accept deposits and give customers access to deposited money through checking or
savings accounts, and to lend money to individuals and businesses. They
are owned publicly or privately, or through a combination of both, and can be
used by all residents.
Commercial banks make money through lending to
customers, offering interest rates above what they pay to depositors. The
difference between what the banks pay in interest and what they take in is
called the ‘spread’ and is their main source of income. Lorenzo VTan defines Commercial banks are the most important part of the banking system as
they provide financial services to the general public and are the type of bank
people use most regularly.
Commercial bank and you know there are two different sets of
parties that are involved. Think of you and me you know when we have access
cash you know we kind of deposit that money in the bank. So we are essentially
depositors, right? A bank is a place where they collect money from various
depositors. So depositors can be in the form of individuals or they can be corporate
as well; a business guy. So essentially what we are saying that the bank
actually collects dollars from these depositors. So what does a depositor get
in return? One is that the money which has been deposited is safe and second what they earned is something called an interest rate.
So let’s call this as interest on the deposit. So if you have deposited $ 100
and the interest rate is 5 % the bank at end of one year will pay you not only
$ 100 which is your initial amount but in your account, you will also see $ 5
which is corresponding to the interest payment. So you will have $ 105 at the
end of one year if you deposit 100 $ in the bank. Now, this is one side where
the bank actually sources money. The second is basically where they deploy the
set of money. So think about you know loans. Loans in the form of you know home
mortgage loans. You know they could be individuals who would like to have car
loans, you know it could be personal loans; it could be any other format of loans. So this may be with
respect to individuals but we may also see some parts of loans that are given
to corporate. So what we are essentially saying is that the bank actually
collects money from the depositors and gives to those guys who are in need of
money. So what do they charge for the benefit of the bank here? The benefit of
the bank is that they earn again interest which we will call that as let’s
assume unknowns and you know this is their interest income and this is their
interest expense. So the bank actually earns money by ensuring that the
interest on loans that they earn is greater than the interest on the deposits
that they give. So this is interest income and on the other side, this is an
expense. So if a bank is able to manage this; the bank will be profitable. So
traditionally the banks have been doing this kind of a business where they are
giving loans and you know this is something like a low-risk kind of a business
and it’s called a commercial or retail bank.
Investment Banks
Investment banks perform
complex financial transactions, linking big businesses with investors to raise
capital for companies and governments. They assist governments and businesses
in issuing securities and selling to investors, help investors safely invest
their capital in bonds, stocks etc. and provide advisory services. They offer
customer specific service and their performance is directly related to the
performance of the financial market. There are three primary functions of
investment banks; corporate finance, wealth management for private clients and
capital markets.
Lorenzo V Tan says that Investment banks earn income by charging fees for their services, and commissions on trading activities and the sale of securities. They are generally privately owned. They have external clients and trade their own accounts, which mean a conflict of interest could occur if trading and advisory divisions are not independent. Clients of investment banks can include financial institutions such as pension and superannuation funds, governments, and companies.
Lorenzo V Tan says that Investment banks earn income by charging fees for their services, and commissions on trading activities and the sale of securities. They are generally privately owned. They have external clients and trade their own accounts, which mean a conflict of interest could occur if trading and advisory divisions are not independent. Clients of investment banks can include financial institutions such as pension and superannuation funds, governments, and companies.
Investment banking doesn’t take
your deposits as the way bank does. Neither do they actually pay our act as a
guarantee for safekeeping the money of the depositors? So investment banks do
not do that. So let’s see what investment banks actually do?
Types of Investment Banks
There are broadly two types of
investment banks in terms of size, scope and presence:
- Full-service – These banks offer the full banquet of available investment services to potential clients, such as underwriting, trading, merger and acquisitions, securities services, merchant banking, and investment management. This might be the sort of bank for you if you’re keen to dip your toe into lots of areas in the world of investment banking.
- Boutique – These investment banks specialize in particular activities, such as advisory services for a specific region, and focus on mid-market deals. If you’re more in favors of specializing, boutique banks might be more up your alley. These investment banks will have expertise in one or two specific fields of work or focus their advice and expertise on a more specific geographic area.
