Investment banking is also known as business banking.
Investment banking is a concept that refers to entities specialized in obtaining money or other financial resources so that private companies or governments can make investments. These financial instruments are obtained by investment banking - also called business banking - through the issuance and marketing of securities in the capital markets.
It is important to indicate that the term banking has several uses. One of them refers to all the banks and bankers . Banking, therefore, can refer to entities that are dedicated to facilitating financing .
Investment , on the other hand, is an economic concept linked to the placement of capital to achieve future profit . This means that the investor gives up an immediate benefit for a future one that is unlikely but which, in principle, should be greater than the current one. The investment contemplates three main variables: the expected return (how much money is expected to be earned), the risk (what probability exists of obtaining the expected profit) and time (when said profit would be achieved).
Operation of investment banking
It is common for investment banking to also offer consulting services for the development of acquisitions, mergers or divisions.
Regulations for the operation of investment banking vary by country. In general, authorities usually grant special licenses for this type of banks, without them being able to operate simultaneously as commercial banks. Investment banking, therefore, cannot take deposits.
It should be noted that the financial crisis that broke out in the United States in 2008 was generated mainly by the bankruptcy of many investment banks, such as Lehman Brothers .
Investment banking is responsible for obtaining financial resources so that governments and companies can invest.
Differences with commercial banks
Commercial and investment banking present many more differences than is generally perceived; These are two well-defined types of business.
With respect to image, commercial banking is mainly perceived by the general public, since it has a large number of branches, accessible to everyone. The business that characterizes it is the payment for its clients' deposits and the collection of the credits it grants them, with the main objective being that the difference between said payments is always positive. On the other hand, it is also dedicated to granting credit cards and carrying out operations such as processing guarantees, transfers , intermediation in the stock market, pension plans and investment funds .
Among the activities of investment banking are the sale of entire divisions between companies , the issuance of bonds , mergers, taking companies public, the design and execution of public acquisition offers (OPA) and trading operations in large-scale financial markets. It is worth mentioning that, unlike the previous one, it does not have many small branches, but rather a few of considerable size.
The benefits are also a point that distinguishes them. Those in commercial banking present great stability, since they very rarely make losses. For the commercial banks of a given country to lose money in the majority of their operations, it is necessary for said territory to be in an absolute emergency crisis.
Investment banking, for its part, has much less stable profits. To put this difference in perspective, during good times in the economy , their profits are much higher than those of commercial banks, but this situation reverses considerably in times of slowdown, to the point of causing sharp declines and losses. The latter, it should be noted, is not an indication of the general economic health of a country, but rather is a normal phenomenon throughout the life cycle of investment banking.