Question

Investment banking and types of investment banks

Answer 1

An investment bank is typically a private company that provides various finance-related and other services to individuals, corporations, and governments such as raising financial capital by underwriting or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities).

Types of Investment Banks

In terms of service scope, size, and presence, there are three distinct types of investment bank:

Full-service investment banks: banks that engage in all types of activities, including trading, underwriting, merchant banking,merger and acquisition, securities services, investment management, and research. Examples of such banks include Goldman Sachs, Morgan Stanley, Credit Suisse, etc. Full-service investment banks are typically categorized as bulge bracketor tier one and tier two. Until September 2008, bulge bracket described the largest investment banks in terms of size and profitability. Examples of bulge brackets, in this sense, included Goldman Sachs, Morgan Stanley, JP Morgan, Citi, UBS, Credit Suisse, Merrill Lynch and Lehman Brothers. After September 2008, an radical shift in the definition of bulge bracket materialized, when Bank of America acquired Merrill Lynch, Leman Brothers collapsed, and Goldman Sachs converted itself into a traditional bank holding company.Boutique investment banks: small investment banks that focus in their business on particular segments. In other words, they specialize in specific activities of investment banking. Usually they are interested in smaller deals, which are worth less than a billion dollars or so (i.e., mid-market deals). They also provide financial advice on mergers and acquisitions deals, private placements, and initial public offerings. Typically, boutique investment banks have one or two offices and may focus on providing advisory services for specific geographic regions. They usually have their activities concentrated on the sell side.Online Investment Banks: banks that have no physical presence, but rather deliver their services via the internet. In this sense, these banks differ from traditional brick and mortar banks in that their value proposition is based on providing online trading and technology solutions, rather than on the trading desk operations. These online banks could be an offshoot of a full-service bank or an online broker with a bank license.