Definition of investment banking

The concept of banking has several uses.One of them refers to the set of banks and bankers .Banking, therefore, can refer to entities which are dedicated to facilitating financing.

Investment , on the other hand, is an economic concept linked to the placement of capital to achieve a future profit This means that the investor resigns an immediate benefit for a future one that is unlikely but that, 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 (how likely it is to obtain the expected profit) and the time (when that profit would be achieved).

The entities that specialize in obtaining money are known as investment banking or business banking or other financial resources so that private companies or governments can make investments.These financial instruments are obtained by the investment bank through the issuance and marketing of securities in the capital markets.

It is common for investment banks to also offer consulting services for the development of acquisitions, mergers or divisions.

The regulations for the operation of investment banking vary by country.Generally, the authorities usually grant special licenses for these types of banks, without being able to operate simultaneously as commercial banks.Investment banking, therefore, it cannot capture deposits.

The financial crisis that broke out in United States in 2008 was mainly caused by the bankruptcy of many investment banks, such as Lehman Brothers .

Differences with commercial banking

Commercial and investment banks have many more differences than are generally perceived; These are two well-defined types of business.

With respect to the image, commercial banking is mainly perceived by the general public, since it has a large number of branches, available to all.The business that characterizes it is the payment for the deposits of its customers and the collection for the credits granted to them, with the main objective that the difference between said payments is always positive.On the other hand, it is also dedicated to granting credit cards and performing operations such as processing of guarantees, transfers, brokerage in the stock market , pension plans and investment funds.

Among the activities of investment banking is the sale of complete divisions between companies, the issuance of bonds, mergers, the taking of companies on the Stock Exchange, the design and The execution of the Public Procurement Offer (takeover bid) and the trading operations in large-scale financial markets.It is worth mentioning that, unlike the previous one, it does not have many small branches, but with a nas few of considerable dimensions.

The benefits are also a point that distinguishes them.The commercial banks have great stability, since very rarely it goes into losses.For the commercial banking of a given country to lose money in most of its operations it is necessary That this territory is in a crisis of absolute emergency.

Investment banking, on the other hand, has much less stable benefits.To put this difference in perspective, during the good times of the economy, its profits are much greater than those of commercial banking, but this situation is reversed considerably in times of deceleration, to the point of causing strong falls and losses.The latter, it is worth noting, is not an indication of the economic health at a general level of a country, but that these are normal phenomena throughout the life cycle of investment banking.