What is Investment Banking?

Investment Banking 101

If you work in the City of London or the financial centers of New York, Tokyo or any of the other leading commercial centers, or if you manage a major company, should someone ask you “what is investment banking?” you are going to have little trouble answering.

For the majority of the world’s population who do not have regular contact with major investment houses, an investment banking 101 can be very useful. When investment banking makes it into the news, it is usually related to some misdemeanor committed by a senior bank official or perhaps this sector is being blamed for a downturn in a national economy. Unfortunately, the less dramatic but essential roles investment banks play within the economy of the developed world is too easily forgotten.

To present a more complete picture to aid in our understanding of what is investment banking, it is important to appreciate the range of activities these banks perform.

In simple terms, their operations can be divided between helping companies raise capital on the equity markets, for example through stocks and bond issues, and their role as advisors to companies looking for ways of improving their market share or financing expansion of their activities. The body of expertise and information these banks build up are placed at the disposal of their clients and assist them to make the best decisions regarding financing their businesses and overcoming the challenges they are encountering.

In addition to understanding their main operations, an investment banking 101 must also incorporate details of the typical investment banking structure. Investment houses operate on three levels. The Front Office is the section of the bank that deals directly with clients offering advice and raising funds on the capital markets. The Middle Office concerns itself with issues such as assessing credit risk and calculating capital limits. The Back Office oversees the implantation and verification of fund transfers, and this is where all the logistics of the investment bank operations are supported including its database and associated computer services.

Appreciating what is investment banking also requires understanding the wide range of commercial activities that fall within its orbit. Investment banks are divided into some distinct industry groups including retail and transport industries, telecommunications and healthcare just to give a few examples. Each of these groups deals with many different clients within their industrial sector. Alongside this division investment banks also have product group divisions, for example, groups specializing in mergers, project finance, and business restructuring.

While trying to understand the structure of the investment banks and the operations they conduct take us into complex areas, the current world economic crisis and the part these banks have played in economic collapse and the roles they might (hopefully) perform in economic recovery make it well worthwhile to learn more about their activities.   

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