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Investment banks, aka '''I-Banks''', assist public and private Corporation s in raising '''funds''' in the Capital Market s (both Equity and Debt ), as well as in providing strategic advisory services for Mergers , Acquisitions and other types of financial transactions. They also act as intermediaries in trading for clients. Investment banks differ from Commercial Bank s, which take deposits and make commercial and retail loans. In recent years, however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services. In the US, the Glass-Steagall Act , initially created in the wake of the Stock Market Crash Of 1929 , prohibited banks from both accepting deposits and underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1998 . Investment banks may also differ from Brokerage s, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world. DEFINITIONS There appears to be considerable confusion today about what does and does not constitute an "investment bank" and "investment banker". In the strictest definition, investment banking is the raising of funds, both in debt and equity, and the name of the division handling this in an investment bank is often called the "Investment Banking Division" (IBD). However, only a few small boutique firms solely provide this - such as Greenhill , with almost all investment banks heavily involved in providing additional financial services for clients such as the trading of fixed income, foreign exchange, commodity and equity securities. It is therefore acceptable to refer to both the "Investment Banking Division" and other 'front office' divisions such as "Fixed Income" as part of "investment banking", and any employee involved in either side an "investment banker". More commonly used today to characterize what was traditionally termed "investment banking" is ''"sell side"''. This is trading securities for cash or securities (i.e., facilitating transactions, market making), or the promotion of securities (i.e. underwriting, research, etc.). The ''"buy side"'' constitutes the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell side in order to maximize their return on investment. Some firms have both buy and sell side components. ROLE OF MODERN INVESTMENT BANKS - TODAY'S SOCIETY The original purpose of an investment bank was to raise capital and advise on mergers and acquisitions and other corporate financial strategies. As banking firms have diversified, investment banks have come to fill a variety of roles (list taken from the Swiss Banking Institute ):
Investment banks have also moved into Foreign Exchange Market s, Private Banking , Asset Management and Bridge Financing . Raising capital in the capital markets THE MAIN ACTIVITIES AND UNITS Large, global investment banks typically have several business units, including ''Investment Banking'', concerned with advising public and private corporations; ''Research'', concerned with producing reports on valuations of financial products; and ''Sales and Trading'', concerned with buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through ''Proprietary Trading'', done by a special set of traders who do not interface with clients and through ''Principal Risk'', risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. An investment bank is split into the so-called Front Office, '''Middle Office''' and '''Back Office'''. The individual activities are described below: FRONT OFFICE
MIDDLE OFFICE
BACK OFFICE
SIZE OF INDUSTRY Global investment banking revenue increased for the third year running in 2005 to $52.8bn. This was up 14% on the previous year but 7% below the 2000 peak. The recovery in the global economy and capital markets resulted in an increase in M&A activity which has been the primary source of investment banking revenue in recent years. There was a decline in revenue between 2000 and 2002 caused by the adverse economic conditions, and a sharp fall in equity markets. The US was the primary source of investment banking income in 2005 with 51% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 31% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 18%. Between 2002 and 2005, fee income from Asia increased by 98%. This compares with a 55% increase in Europe and 46% increase in the US during this period. {Link without Title} RECENT EVOLUTION OF THE BUSINESS Investment Banking is one of the most global industries, and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout Investment Banking history, many have theorized that all investment banking products and services would be commoditized. However, new products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these cannot be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins. For example, trading bonds and equities for customers is now a commodity business, but structuring and trading Derivatives is highly profitable. Each contract has to be uniquely structured to match the client's need, may involve complex pay-off and risk profiles, and is not listed on any market. In addition, while many products have been commoditized, an increasing amount of investment bank profit has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients). COMPENSATION - UK Investment Bankers receive the highest starting salary of any graduate-level job in the United Kingdom - whilst the average starting salary for graduates in the top 100 AGR blue-chip firms is £23,000[http://news.bbc.co.uk/1/hi/education/4603420.stm (and closer to £15,500 for all graduates according to Prospects.co.uk), investment banking graduates can enjoy a starting salary of £35,000 - on top of this, a £5,000 "golden handshake" is typical, with an end-of-year bonus up to a further £30,000 for some 'front office' divisions. This puts a year-one salary for potentially a 21/22 year old at £70,000 - 4.5 times the average for a graduate. Whilst the £35,000 base salary only rises by four figures annually, bonuses for the best performers rises exponentially, being many multiples the size of their base salary, so that many in Corporate Finance, Trading and Sales can expect six-figure pay packages in their 3rd year, when promoted to Associate level. Graduates with a Bachelors or Masters degree begin as Analysts on around £35,000 base salary, those with PhDs or MBAs but no experience begin as Senior Analysts on around £45,000 and those with MBAs and prior experience begin as Associates on around £60,000 (and six-figures when including a bonus). At the upper end, most Managing Directors expect a seven-figure salary. Compensation for bankers who work in the Sales & Trading division varies much more than in actual investment banking. Because compensation is closely attached to the profit generated by each trader, a star Associate with a good relationship with his Managing Director can sometimes earn more than other (presumably less profitable) Managing Directors at the Firm. Those involved in the more complex, structured Derivatives side tend to earn more than those involved in flow products, due to the considerably higher profit margins of using financial "Options". COMPENSATION - USA Unlike the UK, corporate law competes with banking to be the highest-paying graduate job in USA, with potential six-figure starting salaries for both sectors on par with one another. Investment bankers are compensated through a base salary that is paid through the year and a large year-end bonus, in July for junior bankers and in November for senior bankers. In the United States recent graduates, typically of top universities, are hired to fill analyst positions and are commonly paid for their first year a $60,000 salary, a $10,000 sign-on bonus, and a bonus that ranges with the reputation and the profitability of the firm but is usually between $40,000 to $60,000. The base salary increases about $10,000 a year and the size of the bonus increases by about $15,000 a year for analysts. Although the analyst contract expires after 2 years, the best analysts are asked to stay on for a third year, and can be promoted to the Associate level after the 3rd year. MBA graduates usually start at the Associate level. Associate salaries start with a $95,000 base salary, a sign-on bonus, and expected bonus of around $100,000. Vice presidents usually command all-in compensation of half a million dollars. Bankers more senior get paid according to the revenue they produce, but a typical managing director earns $1.5-$2.0 million while a group head might earn $3.0 million to over $10.0 million. It is also interesting that most big banks, like Goldman Sachs and Morgan Stanley , pay lower bonuses than the rest because a short tenure at one of these can drastically increase a banker's value to future employers. Bankers who work outside the major financial centers such as London and New York typically earn significantly smaller bonuses for various reasons, including lower profitabilty of operations, lower cost of living, and in the case of a branch office, the geographic distance from key individuals at head office who may divert money to compensate their own employees. The big picture of compensation is that ultimately about 50% of total revenues is paid out as compensation to employees (Lazard Freres PLC goes as far as setting a ''target'' level for compensation as 57.5% of total revenue). In their 3Q 2005 earnings release, Goldman Sachs earmarked an average of $420,000 per employee per year for compensation (this includes everyone from janitors to the CEO). Partners at Goldman Sachs can make well over $2 million before bonuses, with some stars receiving total compensation over $30 million. {Link without Title} POSSIBLE CONFLICTS OF INTEREST Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be deemed as market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States ) require that banks impose a Chinese Wall which prohibits communication between Investment Banking on one side and Research and Equities on the other. Some of the conflicts of interest involved in investment banking are listed here:
INVESTMENT BANKS Some notable public and private investment banks include:
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