Investment Bank - IB

What Does Investment Bank - IB Mean?

A financial intermediary that performs a variety of services. This includes underwriting, acting
as an intermediary between an issuer of securities and the investing public, facilitating mergers
and other corporate reorganizations, and also acting as a broker for institutional clients.

Investopedia explains Investment Bank - IB

The role of the investment bank begins with pre-underwriting counseling and continues after the
distribution of securities in the form of advice.

An investment bank is a financial institution that assists individuals, corporations and

governments in raising capital by underwriting and/or acting as the client's agent in the issuance
of securities. An investment bank may also assist companies involved in mergers and
acquisitions, and provide ancillary services such as market, trading of derivatives, fixed
income instruments, foreign exchange, commodities, and equity securities.

Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933
(Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley Act), the United States maintained a
separation between investment banking and commercial banks. Other industrialized countries,
including G8 countries, have historically not maintained such a separation.

There are two main lines of business in investment banking. Trading securities for cash or for
other securities (i.e., facilitating transactions, market-making), or the promotion of securities
(i.e., underwriting, research, etc.) is the "sell side", while dealing with 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) constitutes the "buy side". Many firms have
buy and sell side components.

An investment bank can also be split into private and public functions with a Chinese wall which
separates the two to prevent information from crossing. The private areas of the bank deal with
private insider information that may not be publicly disclosed, while the public areas such as
stock analysis deal with public information.

An advisor who provides investment banking services in the United States must be a
licensed broker-dealer and subject to Securities & Exchange Commission (SEC) and Financial
Industry Regulatory Authority (FINRA) regulation.[1]

Main activities
An investment bank is split into the so-called front office, middle office, and back office. While large
service investment banks offer all of the lines of businesses, bothsell side and buy side, smaller ones sell
side investment firms such as boutique investment banks and small broker-dealers focus on investment
banking and sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors buying securities.
For corporations, investment bankers offer information on when and how to place their to an investment
bank's reputation, and hence loss of business. Therefore, investment bankers play a very important role
in issuing new security offerings.

Core investment banking activities

Front office

 Investment banking (corporate finance) is the traditional aspect of investment banks which also
involves helping customers raise funds in capital markets and giving advice on mergers and
acquisitions (M&A). This may involve subscribing investors to a security issuance, coordinating with
bidders, or negotiating with a merger target. Another term for the investment banking division
is corporate finance, and its advisory group is often termed mergers and acquisitions. A pitch bookof
financial information is generated to market the bank to a potential M&A client; if the pitch is
successful, the bank arranges the deal for the client. The investment banking division (IBD) is
generally divided into industry coverage and product coverage groups. Industry coverage groups
focus on a specific industry, such as healthcare, industrials, or technology, and maintain relationships
with corporations within the industry to bring in business for a bank. Product coverage groups focus
on financial products, such as mergers and acquisitions, leveraged finance, project finance, asset
finance and leasing, structured finance, restructuring, equity, and high-grade debt and generally work
and collaborate with industry groups on the more intricate and specialized needs of a client.
 Sales and trading: On behalf of the bank and its clients, a large investment bank's primary
function is buying and selling products. In market making, traders will buy and sell financial products
with the goal of making money on each trade. Sales is the term for the investment bank's sales force,
whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on
a caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the
appropriate trading desks, which can price and execute trades, or structure new products that fit a
specific need. Structuring has been a relatively recent activity as derivatives have come into play, with
highly technical and numerate employees working on creating complex structured products which
typically offer much greater margins and returns than underlying cash securities. In 2010, investment
banks came under pressure as a result of selling complex derivatives contracts to local municipalities
in Europe and the US.[2] Strategists advise external as well as internal clients on the strategies that
can be adopted in various markets. Ranging from derivatives to specific industries, strategists place
companies and industries in a quantitative framework with full consideration of the macroeconomic
scene. This strategy often affects the way the firm will operate in the market, the direction it would like
to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as
well as the way structurers create new products. Banks also undertake risk through proprietary
trading, performed 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.
The necessity for numerical ability in sales and trading has created jobs for physics, mathematics and
engineering Ph.D.s who act as quantitative analysts.

 Research is the division which reviews companies and writes reports about their prospects, often
with "buy" or "sell" ratings. While the research division may or may not generate revenue (based on
policies at different banks), its resources are used to assist traders in trading, the sales force in
suggesting ideas to customers, and investment bankers by covering their clients. Research also
serves outside clients with investment advice (such as institutional investors and high net worth
individuals) in the hopes that these clients will execute suggested trade ideas through the sales and
trading division of the bank, and thereby generate revenue for the firm. There is a potential conflict of
interest between the investment bank and its analysis, in that published analysis can affect the bank's
profits. Hence in recent years the relationship between investment banking and research has become
highly regulated, requiring a Chinese wall between public and private functions.
Other businesses that an investment bank may be involved in

 Global transaction banking is the division which provides cash management, custody services,
lending, and securities brokerage services to institutions. Prime brokerage with hedge funds has been
an especially profitable business, as well as risky, as seen in the "run on the bank" with Bear
Stearns in 2008.

 Investment management is the professional management of various securities (shares, bonds,

etc.) and other assets (e.g., real estate), to meet specified investment goals for the benefit of
investors. Investors may be institutions (insurance companies, pension funds, corporations etc.)
or private investors (both directly via investment contracts and more commonly via collective
investment schemes e.g., mutual funds). The investment management division of an investment bank
is generally divided into separate groups, often known as Private Wealth Management and Private
Client Services.

 Merchant banking is a private equity activity of investment banks.[3] Current examples

include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant
bank" was the British English term for an investment bank.)

 Commercial banking: see commercial bank.

Middle office

 Risk management involves analyzing the market and credit risk that traders are taking onto the
balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are
able to trade in order to prevent "bad" trades having a detrimental effect on a desk overall. Another
key Middle Office role is to ensure that the economic risks are captured accurately (as per agreement
of commercial terms with the counterparty), correctly (as per standardized booking models in the
most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent
years the risk of errors has become known as "operational risk" and the assurance Middle Offices
provide now includes measures to address this risk. When this assurance is not in place, market and
credit risk analysis can be unreliable and open to deliberate manipulation.

 Corporate treasury is responsible for an investment bank's funding, capital structure

management, and liquidity risk monitoring.

 Financial control tracks and analyzes the capital flows of the firm, the Finance division is the
principal adviser to senior management on essential areas such as controlling the firm's global risk
 exposure and the profitability and structure of the firm's various businesses. In the United States and
United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial
Officer.

 Corporate strategy, along with risk, treasury, and controllers, also often falls under the finance
division.

 Compliance areas are responsible for an investment bank's daily operations compliance with
government regulations and internal regulations. Often also considered a back-office division.

Back office

 Operations involves data-checking trades that have been conducted, ensuring that they are not
erroneous, and transacting the required transfers. While some believe that operations provides the
greatest job security and the bleakest career prospects of any division within an investment bank,
[4]
many banks have outsourced operations. It is, however, a critical part of the bank. Due to increased
competition in finance related careers, college degrees are now mandatory at most Tier 1 investment
banks.[citation needed] A finance degree has proved significant in understanding the depth of the deals and
transactions that occur across all the divisions of the bank.

 Technology refers to the information technology department. Every major investment bank has
considerable amounts of in-house software, created by the technology team, who are also
responsible for technical support. Technology has changed considerably in the last few years as
more sales and trading desks are using electronic trading. Some trades are initiated by
complexalgorithms for hedging purposes.

Size of industry
Global investment banking revenue increased for the fifth year running in 2007, to a record US$84.3
billion,[5] which was up 22% on the previous year and more than double the level in 2003. Subsequent to
their exposure to United States sub-prime securities investments, many investment banks have
experienced losses since this time.

The United States was the primary source of investment banking income in 2007, with 53% of the total, a
proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa)
generated 32% of the total, slightly up on its 30% share a decade ago.[citation needed] Asian countries
generated the remaining 15%. Over the past decade, fee income from the US increased by 80%.[citation
needed]
This compares with a 217% increase in Europe and 250% increase in Asia during this period.[citation
needed]
The industry is heavily concentrated in a small number of major financial centers,
including London, New York City, Hong Kong and Tokyo.

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. New products with higher margins
are constantly invented and manufactured by bankers in the hope of winning over clients and developing
trading know-how in new markets. However, since these can usually not be patented orcopyrighted, 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,[citation needed] but
structuring and trading derivatives retains higher margins in good times—and the risk of large losses in
difficult market conditions, such as the credit crunch that began in 2007. Each over-the-counter contract
has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts
are traded through major exchanges, such as the CBOE, and are almost as commoditized as general
equity securities.

In addition, while many products have been commoditized, an increasing amount of profit within
investment banks 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).

The fastest growing segment of the investment banking industry are private investments into public
companies (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately
negotiated between companies and accredited investors. These PIPE transactions are non-rule 144A
transactions. Large bulge bracket brokerage firms and smaller boutique firms compete in this sector.
Special purpose acquisition companies (SPACs) or blank check corporations have been created from this
industry.[citation needed]

Vertical integration
In the U.S., 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, and led to segregation of
investment banks from commercial banks. Glass–Steagall was effectively repealed for many large
financial institutions by the Gramm–Leach–Bliley Act in 1999.

Another development in recent years has been the vertical integration of debt securitization.[citation
needed]
Previously, investment banks had assisted lenders in raising more lending funds and having the
ability to offer longer term fixed interest rates by converting lenders' outstanding loans into bonds. For
example, a mortgage lender would make a house loan, and then use the investment bank to sell bonds to
fund the debt, the money from the sale of the bonds can be used to make new loans, while the lender
accepts loan payments and passes the payments on to the bondholders. This process is called
securitization. However, lenders have begun to securitize loans themselves, especially in the areas of
mortgage loans. Because of this, and because of the fear that this will continue, many investment banks
have focused on becoming lenders themselves,[6] making loans with the goal of securitizing them. In fact,
in the areas of commercial mortgages, many investment banks lend at loss leader interest rates[citation
needed]
in order to make money securitizing the loans, causing them to be a very popular financing option
for commercial property investors and developers.[citation needed] Securitized house loans may have
exacerbated the subprime mortgage crisis beginning in 2007, by making risky loans less apparent to
investors.

Investment banking is a particular form of banking which finances capital requirements

of enterprises. Investment banking assists as it performs IPOs, private placement and
bond offerings, acts as broker and carries through mergers and acquisitions.

Functions of Investment Banking:

Investment banks have multilateral functions to perform. Some of the most important
functions of investment banking can be jot down as follows:

 Investmentbanking help public and private corporations in issuing securities in the

primary market, guarantee by standby underwriting or best efforts selling and foreign
exchange management . Other services include acting as intermediaries in trading for
clients.
 Investment banking provides financial advice to investors and serves them by
assisting in purchasing securities, managing financial assets and trading securities.
 Investment banking differ from commercial banking in the sense that they don't
accept deposits and grant retail loans. However the dividing line between the two
fraternal twins has become flimsy with loans and securities becoming almost
substitutable ways of raising funds.
 Small firms providing services of investment banking are called boutiques. These
mainly specialize in bond trading, advising for mergers and acquisitions,
providing technical analysis or program trading.
Barclays India
ICICI Securities Ltd
Barclays India
Cholamandalam Investment & Finance Company
IDFC
Industrial Development Bank of India
Kotak Investing Banking
Tata Investment Corporation Limited (TICL)
UTI Securities Ltd
Yes Bank
JP Morgan (Mumbai & Bangalore)
UBS(Hyd & Mumbai)
Goldman Sach(Blr)
Lehman Bros
ANZ
ABN
Morgan Stanley (Mumbai)
Citigroup (Not in India)
BNP Paribas(Not in india)
Deutsche Bank (delhi, Bangalore , bom)
HSBC (Blr)
Merrill Lynch

Enam
Kotak Mahindra
SBI Capital Markets
Ambit Corp Finance
ICICI Securities