Role of The Investment Bankers in The Financial System

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The key takeaways are that investment banking involves raising capital for companies through activities like underwriting, mergers and acquisitions advisory, and trading securities. It also discusses the roles of investment bankers and how investment banking differs from commercial/retail banking.

Investment bankers work at investment banks and help companies raise capital through public offerings of stocks and bonds or private placements of stocks and bonds. They also advise companies on mergers, acquisitions, and corporate restructurings.

Investment banking is a high margin business that involves raising capital and trading securities for companies, while commercial/retail banking is a lower margin business that involves taking deposits and providing loans to individuals and businesses.

EXECUTIVE SUMMARY:Investment Banking encompasses not merely merchant banking but

other related capital market activities. Investment bankers identify capital


opportunities, negotiate and structure deals, and execute private and
public financial transactions.

Investment banks differ from commercial banks, which take deposits and
make commercial and retail loans. In recent years, however, the lines
between the two types of structure have blurred, especially as
commercial banks have offered more investment banking services. An
investment banking firm also does a large amount of consulting.

Through investment banking, an institution can generates funds in two


different ways. They may draw on public funds through the capital
market by selling stocks in their company, and they may also seek out
venture capital or private equity in exchange for a stake in their
company. Investment banking thus can be defined as a broader term
which covers both fund and fee based activities.

Over the decades, Investment Banking has transformed itself to suit the
technological needs of the world of finance. Investment bankers have
always enjoyed celebrity status, but at times have paid the price for
excessive flamboyance as well.
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OVERVIEW:Investment Banking is an incredibly broad and multidimensional sector,


which is quite often misunderstood. Ranging from boutique subject
matter experts to multi-national, full-service conglomerates, there are
around 3,000 Investment Banks operating globally today. The term
Investment Bank is commonly used to define a financial firm which
assists in the raising of capital in the form of debt (bonds) and/or equity
(stocks). The term is used so frequently that its meaning often carries
misconceptions. Many financial institutions are involved in investment
banking to some extent; however, most have both investments banking
functions as well as sales & trading functions.

Many employees within an investment bank report into the Sales &
Trading division, where they can serve, for example, as Brokers or
Traders. These employees should not be considered Investment
Bankers even as they are working for an investment bank. Simply put,
an investment bank is a financial institution that raises capital, trades
securities, insures bonds, and manages corporate mergers and
acquisitions in exchange for fees and commissions. Financial institutions
who partake in these activities employ licensed advisers who will
manage and provide advice on these transactions.

An investment banks clients can be either public or private corporations.


Because Investment Banking is a global industry, firms compete to be at
the forefront in their product offerings, assets, and technology. Once a
product is known to create large margins and draw in clients, it is normal
for other banks to mimic these products in attempt to retain a competitive
edge. All financial institutions, including investment banks, seek to
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM)

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maximize their profitability by managing their level of risk; and for the
most part, the larger the risk, the larger the potential reward.

A distinction should be made between Investment Banking and


Commercial/Retail Banking. Commercial/Retail Banks are institutions
which make loans and accept deposits from clients. Commercial/Retail
Banking is a low margin, high transaction business whereas Investment
Banking is a high margin business with a relatively low volume of
transactions or deals. Although some Commercial/Retail Banks provide
investment banking services, these functions are separated.

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INTRODUCTION:Investment banking is a very vast area in the field of banking and


finance. Investment banking includes a wide variety of activities,
including underwriting, selling, and trading securities, providing financial
advisory services, and managing assets. Investment banks cater to a
diverse group of stakeholders, companies, governments, non-profit
institutions, and individuals and help them raise funds on the capital
market.

Investment banking is a specific division of banking related to the


creation of capital for other companies. The work of an investment bank
begins right from the counseling before the underwriting sessions, and
stretches right till the securities are properly handled and distributed.
There are a number of investment banks that also provide highly
professional services in assisting their clients with industrial know-how
on various parameters.

Nevertheless, it would be unfair to conclude so, that over the decades,


backed by the evolution and also fuelled by recent technologies
developments, investment banking has transformed repeatedly to suit
the needs of the finance community and thus become one of the most
vibrant and exciting segment of financial services.

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INVESTMENT BANKING:What is investment banking? Is it investing? Is it banking? Or is it


investing in banks? Really, it is neither. Investment banking, or Ibanking, as it is often called, is the term used to describe the business of
raising capital for companies and advising them on financing and merger
alternatives. Companies need cash in order to grow and expand their
business; investment banks sell securities to public investors in order to
raise this cash. These securities can come in the form of stocks or bonds

An investment bank is a financial institution which raises capital, trades


securities, and manages corporate mergers and acquisitions. Another
term used for investment banking is corporate finance. It includes raising
and managing funds, advising clients about investments and marketing
financial products.

In the words of, John. F. Marshall and M. E. Eills, investment banking is


what investment banks do. The definition can be explained in the
context of how investment banks have evolved in their functionality and
how history and regulatory inventions have shaped such an evolution.
Much of investment bank in its present form thus owes its origins to the
financial markets in the USA, due to which American Investment Banks
have been the leaders in the American and Euro markets as well.
Therefore the term investment banking can arguably be said to be of
American origin.

Investment banks once contrasted sharply with commercial banks,


where people mainly deposited their money and sought commercial and
retail loans. In recent years, though, the two types of structures have
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become increasingly similar; commercial banks now offer more


investment banking services as they attempt to corner the market by
presenting themselves as one-stop shops. Investment banks do differ
from brokerages and broker-dealers, though, even though those three
entities are often thought of as one and the same.

A brokerage firm takes a commission for assisting in the purchase and


sale of stocks, bonds, and mutual funds. A broker-dealer executes
similar functions, but it also trades for its own account. An investment
bank actually is a broker-dealer that provides corporations with financial
services, such as assistance with initial public offerings, merger and
acquisitions advice, and strategic planning.

Investment banking in the US is a very old industry and the top


investment banking firms have become MNCs with presence in most of
the countries across the globe. 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 making, trading of derivatives, fixed income instruments,
foreign exchange, commodities, and equity securities.

Investment banks are financial entities that primarily help businesses


raise funds through the sale of securities. They differ from commercial
banks in that they do not take deposits. Investment bankers facilitate the
movement of investment capital, from large investment funds at
institutions, into corporations for expansion and general corporate
purposes.
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SIZE OF THE INDUSTRY:Global investment banking revenue increased for the fifth year running in
2007, to a record US$84.3 billion. This was up 22% on the previous year
and more than doubles 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. Asian
countries generated the remaining 15%. Over the past decade, fee
income from the US increased by 80%. This compares with a 217%
increase in Europe and 250% increase in Asia during this period. The
industry is heavily concentrated in a small number of major financial
centers, including City of London, New York City, Hong Kong and Tokyo.

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FUNCTIONS OF INVESTMENT BANKS:Investment banks carry out multilateral functions. Some of the most
important

functions

of

investment

banking

are

as

follows:

Investment banking 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
helps them by assisting in purchasing and trading securities as
well as managing financial assets
Investment banking differs 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.
They also helping companies raise money by assisting in initial
public offerings (IPO), helping companies issue debt, providing
research to companies and advising companies on deals such as
acquisitions and mergers.

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INVESTMENT BANKER:A person representing a financial institution that is in the business of


raising capital for corporations and municipalities is called as an
Investment Banker. An investment banker may not accept deposits or
make commercial loans. Investment bankers are the people who do the
ground work for IPOs and bond issues.

An Investment Banker can be considered as a total solutions provider for


any corporate, desirous of mobilizing its capital. The services provided
range from investment research to investor service on the one hand and
from preparation of the offer documents to legal compliances and post
issue monitoring on the other. A long lasting relationship exists between
the Issuer Company and the Investment Banker.

Investment banking is a particular form of banking that finances capital


requirements of an enterprise. Investment bankers help companies and
governments and their agencies to raise money by issuing and selling
securities in the primary market. They assist public and private
corporations in raising funds in the capital markets (both equity and
debt), as well as in providing strategic advisory services for mergers,
acquisitions and other types of financial transactions. Investment
bankers are regarded as those persons who generally give consultation
to their valued clients in order to sort out any of their high level issues
that may have taken place in their financial organization.

The Investment Banks as well as the investment bankers earn profit by


charging fees and commissions for providing these services and other
kinds of financial and business advice.
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RESPONSIBILITIES OF THE INVESTMENT BANKERS:Apart from advising the investment bankers also performs various
functions such as:
Investment bankers administer the bonds-issuance.
Recommend and perform way-out to take over and collaborate
with other organization.
Control the selling of the stock of their organization to the general
public.
They also play the role of strategists in order to solve out financial
problems of their clients.
They also help the clients to develop their financial policies and
also apply them.
Even investment bankers act as the vital figures in molding
economies of the entire globe, managing collaborators of
multibillion-dollar conglomerates and tackling the Government
asset's privatization.
Investment bankers also emerge new innovative ideas and
schemes for developing strategies to pitch to clients.
Prepare monetary analyses and documents.
Work with the sales teams of their banks in selling the bonds and
stocks

which

are

produced

by

the

investment-banking

department's activities.
Investment banker also represents an economic establishment
that is in the business of increasing capital for corporations and
municipalities.
Even Investment bankers do the grunt work for IPO's and bond
issues.
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 10

An investment banker at cosmopolitan standard also possesses


banking panels which are controlled by superior associates who
have authority and experience in their clients throughout the world.
Investment bankers provide access to dedicated assistance which
is

featured

by commitment

to

national markets

and

an

understanding of the profitable and edifying differences between


various countries.
The investment banks can enjoy an unexpected stage of strong
economic conditions and growth which enables them to transport
trace gain through the advice of the investment banker.
Even it is the work of the investment bankers to spotlight on people
and cost control in the present situation also suggests controlling
economy during good and bad times.
The major concentration in the investment banking industry has
always been on growth at utmost level rather than diminishing cost
and competence. But investment bankers take care of all the
aspects thoroughly in a very efficient manner so that improvement
takes place in the entire segment.
The investment bankers maintains and performs all the functions
in a very effective procedure without any loss incurred on the firms
or organizations as the total financial and investment filed are
governed by him.

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HISTORY OF THE INVESTMENT BANKS:A Snapshot History of Investment Banking:


Investment banking practices such as extending credit to merchants
date back to ancient times. In the 1600s, early investment institutions
such as acceptance houses and merchant banks helped finance foreign
trade and accumulated funds for long-term investments overseas.

The nineteenth century saw the rise of several prominent banking


partnerships such as those created by Rothschilds, the Barings and the
Browns. These firms had their origins in the Atlantic trade; financing the
importation of commodities for European manufacturers and helping
them export their finished products around the world.

In the United States, investment banking received a boost during the


American Civil War. Syndicate banking houses sold millions of dollars
worth of government bonds to large numbers of individual investors to
help finance the war. This marked the first mass-market securities sales
operation, a practice that continued later in the 1800s to finance the
expansion of the transcontinental railroads.

The 1800s also saw the birth of some of the most famous firms in
investment banking, many of which are still with us, in one form or
another, 150 years later. The firm of J. P. Morgan played a major role in
the corporate mergers of the era, such as the merger of U.S. Steel Corp
and the Northern Pacific and Great Northern railroads. The firm grew to
such size and prominence at the turn of the century that J.P. Morgan,

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 12

the founder, is credited for saving Wall Street during the banking crisis
of 1907 by allegedly locking top executives from major banks in his office
until they hammered out a solution.

Goldman Sachs was founded in 1869 by German Jewish immigrants


Marcus Goldman who later partnered with his son-in-law, Samuel Sachs.
Goldman Sachs was among the pioneers of the initial public offering
(IPO), and managed one of the largest IPOs at that time, for Sears,
Roebuck and Company in 1906.

In

the

early

twentieth

century,

investment

banking

expanded

dramatically. One reason was an increase in the number of individuals


who owned stock, something that resulted from the prosperous years
after the First World War. However, the ensuing run-up in stock prices
created an unsustainable bubble that finally collapsed with the Great
Depression in 1929. The U.S. plunged into one of the worst depressions
in history. More than 11,000 banks failed or merged, and a quarter of the
population was out of work.

The excesses of that period and the many bank failures led to a flood of
new regulations to protect investors from fraudulent stock promoters and
stabilize the banking system. It led to the passing of the Federal
Securities Act of 1933, which required full disclosure of accurate
information for publicly offered securities and a prospectus filed with the
Securities and Exchange Commission.

More importantly for investment banks, the government passed the


Glass-Steagall Act in 1933, which compelled commercial banks to
separate themselves from their securities distribution arms. Large
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 13

universal banks such as JP Morgan, for instance, split into separate


entities. In JP Morgans case, it created JP Morgan as a commercial
bank, Morgan Stanley as an investment bank, and Morgan Grenfell, as a
British merchant bank. The Glass-Steagall Act remained in force until it
was repealed during the Clinton administration in 1999.

The Glass-Steagall Act (or more specifically, the Bank Act of 1933) was
enacted by the government with the intent of rehabilitating the banking
industry by erecting a wall between commercial banking and investment
banking.

The Glass-Steagall Act said that commercial banks can lend money,
extend lines of credit, and open checking and savings accounts, while
investment banks can underwrite securities, advice on M&A, and provide
institutional brokerage services. It also compelled commercial banks to
separate themselves from their securities distribution arms.

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Investment Banking History in the 20th Century:


In the mid-20th century, large investment banks were dominated by the
dealmakers. Advising clients on mergers and acquisitions and public
offerings was the main focus of major Wall Street partnerships. These
bulge bracket firms included Goldman Sachs, Morgan Stanley, Lehman
Brothers, First Boston and others.

That trend began to change in the 1980s as a new focus on trading


propelled firms such as Salomon Brothers, Merrill Lynch and Drexel
Burnham Lambert into the limelight. Investment banks earned an
increasing amount of their profits from proprietary trading. Advances in
computing technology also enabled banks to use more sophisticated
model driven software to execute trades and generate a profit on small
changes in market conditions.

In the 1980s, financier Michael Milken popularized the use of high yield
debt (also known as junk bonds) in corporate finance and mergers and
acquisitions. This fueled a boom in leverage buyouts and hostile
takeovers. Filmmaker Oliver Stone immortalized the spirit of the times
with his movie, Wall Street, in which Michael Douglas played the role of
corporate raider Gordon Gekko and epitomized corporate greed.

Investment banks profited handsomely during the boom years of the


1990s and into the tech boom and bubble. When the tech bubble burst,
it precipitated a string of new legislation to prevent conflicts of interest
within investment banks. Investment banking research analysts had
been

actively

promoting

stocks

to

investors

while

privately

acknowledging they were not attractive investments. In other instances,


ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 15

analysts gave favorable stock ratings to corporate clients in the hopes of


attracting them as investment banking clients and handling potentially
lucrative initial public offerings.

These scandals paled by comparison to the financial crisis that has


enveloped the banking industry since 2007. The speculative bubble in
housing prices along with an overreliance on sub-prime mortgage
lending trigged a cascade of crises. Two major investment banks, Bear
Stearns and Lehman Brothers, collapsed under the weight of failed
mortgage-backed securities. In March, 2008, the Federal government
began using a variety of taxpayer-funded bailout measures to prop up
other firms. The Federal Reserve offered a $30 billion line of credit to
J.P. Morgan Chase to that it could acquire Bear Sterns. Bank of America
acquired Merrill Lynch. The last two bulge bracket investment banks,
Goldman Sachs and Morgan Stanley, elected to convert to bank holding
companies and be fully regulated by the Federal Reserve.

Moving forward, the recent financial crisis has weakened both the
reputation and the dominance of U.S. investment banking organizations
throughout the world. The growth of foreign capital markets along with
an increase in pools of sovereign capital is changing the landscape of
the industry.

The growing international flow of capital has also opened up


opportunities for investment banking in new financial centers around the
world, including those in developing countries such as India, China and
the Middle East.

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EVOLUTION OF INDIAN INVESTMENT BANKING:The origin of investment banking in India can be traced back to the
19thcentury when European merchant banks set-up their agency houses
in the country to assist in the setting of new projects. In the 20th century,
large business houses followed suit by establishing managing agencies
which acted as issue house for securities, promoters for new projects,
etc. The peculiar feature of these agencies was that their services were
restricted only to the companies of the group to which they belonged. A
few small brokers also started rendering Merchant banking services, but
theirs was limited due to their small capital base.

In India, though the existence of this branch of financial services can be


traced to over three decades, investment banking was largely confined
to merchant banking services. The forerunners of merchant banking in
India were the foreign banks; Grindlays Bank (now merged with
Standard Chartered Bank in India) began merchant banking operations
in 1967 with a licence from the RBI followed by the Citibank in 1970.
These two banks were providing services for syndication of loans and for
raising of equity apart from advisory services. The foreign banks
monopolized merchant banking services in the country.

It was in 1972, that the Banking Commission Report, asserted the need
for merchant banking services in India by the public sector banks. Based
on the American experience, which led to the passage of the GlassSteagall Act, the Commission recommended a separate structure for
merchant

banks

distinct

from

commercial

banks

and

financial

institutions. Merchant banks were meant to manage investments and


provide advisory services.
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 17

Following the above recommendations, the State Bank of India (SBI)


ventured into this business by starting a merchant banking division in
1972. Other banks such as the Bank of India, Central Bank of India,
Bank of Baroda (BOB), Syndicate Bank, Punjab National Bank (PNB),
Canara Bank followed the suit to set up their Merchant Banking outfits.
In 1973, ICICI became the first financial institution to offer merchant
banking services. JM finance was set-up by Mr. Nimesh Kampani as an
exclusive merchant bank in 1973.

The growth of the industry was very slow during this period. By 1980, the
number of merchant banks rose to 33 and was set-up by commercial
banks, financial institutions and private sector. The capital market
witnessed some buoyancy in the late eighties. The advent of economic
reforms in 1991 resulted in sudden spurt in both the primary and
secondary market. Several new players entered into the field. The later
entrants were IFCI (Industrial Finance Corporation of India) and IDBI
(Industrial Development Bank of India) with the latter setting up its
merchant banking division in 1992.

The advent of SEBI in 1992 was a major boost to the merchant banking
activities in India and the activities were further propelled by the
subsequent introduction of free pricing of primary market equity issues in
1992. Post-1992, there was lot of fluctuations in the issue market
affecting the merchant banking industry. SEBI started regulating the
merchant banking activities in 1992 and a majority of the merchant
bankers were registered with it. The number of merchant bankers
registered with SEBI began to dwindle after the mid-nineties due to the
inactivity in the primary market. Many of the merchant bankers were into
issue management or associated activity such as underwriting or
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 18

advisory. Many merchant bankers succumbed to the downturn in the


primary market because of the over-dependence on issue management
activity in the initial years. Also not all the merchant bankers were able to
transform themselves into full-fledged investment banks. Currently
bigger industry players who are in investment banking are dominating
the industry. SEBI had four categories of merchant bankers with varying
eligibility criteria based on their net worth. The highest number of
registered merchant bankers with SEBI as at the end of March 2003 was
124, from a peak of almost thousand in the nineties. In the financial year
2002-2003 itself, the number decreased by 21.

However, by the mid-eighties and early nineties, most of the merchant


banking divisions of public sector banks were spun off as separate
subsidiaries. SBI set up SBI Capital Markets Ltd in 1986. Other such as
Canara Bank, BOB, PNB, Indian Bank and ICICI created separate
banking entities. IDBI created IDBI Capital Markets much later since
Merchant banking was initially formed as a division if IDBI in 1992.

Many foreign investment banks started entering Indian markets like.


These firms had a huge capital base, global distribution capacity and
expertise. However, they were new to Indian markets and lacked local
penetration. Many of the top rung Indian merchant banks, who had string
domestic base, started entering into joint ventures with the foreign
banks. This energy resulted in synergies as their individual strength
complemented each other.

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REGULATORY FRAMEWORK FOR INVESTMENT BANKING


IN INDIA:An overview of the regulatory framework is furnished below:

All investment banks incorporated under the Companies Act, 1956


are governed by the provisions of that Act.
Those investment banks that are incorporated under a separate
statute are regulated by their respective statute. Ex: SBI, IDBI.
Universal banks that function as investment banks are regulated
by RBI under the RBI Act, 1934.
All Non-banking Finance Companies that function as investment
banks are regulated by RBI under RBI Act, 1934.
SEBI governs the functional aspects of Investment banking under
the Securities and Exchange Board of India Act, 1992.
Those investment banks that carry foreign direct investment either
through joint ventures or as fully owned subsidiaries are governed
by Foreign Exchange Management Act, 1999 with respect to
foreign investment.

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CONSTRAINTS IN INDIAN INVESTMENT BANKING:Due to the over-dependence on issue management activity in the initial
years, most merchant banks perished in the primary market downturn
that followed later. In order to stabilize their businesses, several
merchant banks diversified to offer a broader spectrum of capital market
services. However, other than a few industry leaders, the other merchant
banks have not been able to transform themselves into full service
investment banks.

Going by the service portfolio of the leading full service investment


banks in India, it may be said that the industry in India has seen more or
less similar development as its western counterparts, though the breadth
available in the overseas capital market is still not present in the Indian
capital market. Secondly, due to the lack of institutional financing in a big
way to fund capital market activity, it is only the bigger industry players
who are in investment banking. The third major deterrent has also been
the lack of depth in the secondary market, especially in the corporate
debt segment.

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INVESTMENT BANKS ORGANIZATIONAL STRUCTURE /


CORE BUSINESS OF INVESTMENT BANKERS: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 securities on the open
market, an activity very important to an investment bank's reputation.
Therefore, investment bankers play a very important role in issuing new
security offerings.

While large service investment banks offer all lines of business, both sell
side and buy side; smaller investment banks may specialize in either of
them.

An Investment Bank basically undertakes Two Lines of Business:

Sell Side Investment Firms:


All the insider functions might be termed as the sell side. This is trading
securities for cash or securities (i.e., facilitating transactions, marketmaking), or the promotion of securities (i.e. underwriting, research, etc.).
Smaller sell side investment firms such as boutique investment banks
and

small

broker-dealers

focus

on

investment

banking

and

sales/trading/research, respectively.

Being in the sell side it trades securities either for cash or for other
securities by facilitating transactions and making market. Underwriting
and carrying research work for the promotion of securities are the other
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 22

roles it performs as an insider. The sell side typically refers to selling


shares of newly issued IPOs, placing new bond issues, engaging in
market making services, or helping clients facilitate transactions.

Buy Side Investment Firms:


All the outsider functions sometimes may be coined as the buy side.
The "buy side" constitutes the 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. The buy
side, in contrast, works with pension funds, mutual funds, hedge funds,
and the investing public to help them maximize their returns when
trading or investing in securities such as stocks and bonds.

This is how an Investment bank offers services to both corporations &


investors helping the earlier in issuing securities and the later in buying
them but maintaining the Chinese wall to prevent information from
crossing, that is blocking the classified information of a company to be
disclosed in public and vice versa.

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BUY SIDE

ORGANIZATIONAL
STRUCTURE OF
INVESTMENT
BANKS/
BUSINESS OF
INVESTMENT
BANKERS

LINES OF
BUSINESS
SELL SIDE

FRONT OFFICE

MIDDLE OFFICE

CORE
ACTIVITIES
BACK OFFICE
OTHER
BUSINESSES

Investment banks are split up into front office, middle office, and back
office. Each sector is very different yet plays an important role in making
sure that the bank makes money, manages risk, and runs smoothly.

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FRONT OFFICE:The front office generates the banks revenue and consists of three
primary divisions: investment banking, sales & trading, and research.

Investment Banking:
Investment Banking/Corporate Finance is the traditional aspect of
investment banks which involves helping customers raise funds in the
Capital Markets and advising on mergers and acquisitions. A pitch book
of 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 by preparing all materials necessary for the transaction as well as
the execution of the deal, which may involve subscribing investors to a
security issuance, coordinating with bidders, or negotiating with a merger
target. This may involve subscribing investors to a security issuance,
coordinating with bidders, or negotiating with a merger target.

The investment banking division (IBD) is generally divided into industry


coverage and product coverage groups.

Industry 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.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 25

Product Coverage Groups:Product coverage groups focus on financial products, such as mergers
and acquisitions, leveraged finance, public 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.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 26

In 2010, investment banks came under pressure as a result of selling


complex derivatives contracts to local municipalities in Europe and the
US.

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 new products are created.

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.

Research:
The research division 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.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 27

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.

FRONT OFFICE

INVESTMENT
BANKING

INDUSTRY
COVERAGE
GROUPS

SALES &
TRADING

RESEARCH

PRODUCT
COVERAGE
GROUPS

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 28

MIDDLE OFFICE:Middle office typically includes risk management, financial control,


corporate treasury, corporate strategy, and compliance. Ultimately, the
goal of the middle office is to ensure that the investment bank doesnt
engage in certain activities that could be detrimental to the banks overall
health as a firm.

In capital raising, especially, there is significant

interaction between the front office and middle office to ensure that the
company is not taking on too much risk in underwriting certain securities.

Risk Management:
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 to a
desk overall.

Another key Middle Office role is to ensure that the above mentioned
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 include 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.
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 29

Corporate Treasury:
Treasury management (or treasury operations) includes management of
an enterprise's holdings, with the ultimate goal of maximizing the firm's
liquidity and mitigating its operational, financial and reputational risk.
Treasury Management includes a firm's collections, disbursements,
concentration, investment and funding activities. In larger firms, it may
also include trading in bonds, currencies, financial derivatives and the
associated

financial

risk

management.

The

corporate

treasury

department is responsible for an investment bank's funding, capital


structure management, and liquidity risk monitoring. Larger banks have
whole departments devoted to treasury management and supporting
their clients' needs in this area.

Bank Treasuries may have the following departments:

Fixed Income or Money Market Desk: A Fixed Income or Money


Market desk that is devoted to buying and selling interest bearing
securities.

Foreign Exchange or "FX" Desk: A Foreign exchange or "FX"


desk that buys and sells currencies.

Capital Markets or Equities Desk: A Capital Markets or Equities


desk that deals in shares listed on the stock market.

Proprietary Trading Desk: A Proprietary Trading desk that


conducts trading activities for the banks own account and capital.
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 30

Asset Liability Management or ALM Desk: An Asset liability


management or ALM desk that manages the risk of interest rate
mismatch and liquidity.

Transfer Pricing or Pooling Function: A Transfer pricing or pooling


function that prices liquidity for business lines (the liability and
asset sales teams) within the bank.

Finance Control / Internal Control:


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 via
dedicated trading desk product control teams. In the United States and
United Kingdom, a Financial Controller is a senior position, often
reporting to the Chief Financial Officer.

In accounting and auditing, internal control is defined as a process


affected by an organization's structure, work and authority flows, people
and

management

information

systems,

designed

to

help

the

organization accomplish specific goals or objectives. It is a means by


which an organization's resources are directed, monitored, and
measured. It plays an important role in preventing and detecting fraud
and protecting the organization's resources, both physical (e.g.,
machinery and property) and intangible (e.g., reputation or intellectual
property such as trademarks).

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 31

Corporate Strategy / Strategic Management:


Strategic management analyzes the major initiatives taken by a
company's top management on behalf of owners, involving resources
and performance in external environments. It entails specifying the
organization's mission, vision and objectives, developing policies and
plans, often in terms of projects and programs, which are designed to
achieve these objectives, and then allocating resources to implement the
policies and plans, projects and programs. A balanced scorecard is often
used to evaluate the overall performance of the business and its
progress towards objectives. Strategic management can depend upon
the size of an organization, and the propensity to change of its business
environment. Strategic management can occur at corporate, business,
functional and operational levels.

The two main approaches are opposite but complement each other.

Industrial Organizational Approach:The Industrial Organizational approach is based on economic theory and
deals with issues such as competition, resource allocation and
economies

of

scale.

It

assumes

rationality

and

targets

profit

maximization.

Sociological Approach:The Sociological Approach deals primarily with human interactions and
assumes bounded rationality, satisficing behavior and lower profits.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 32

Strategic management can be viewed as bottom-up, top-down, or


collaborative.

Bottom-Up Approach:In the bottom-up approach, employees submit proposals to their


managers who funnel the best ideas up the ladder. This is often part of a
capital budgeting process. Proposals are assessed using financial
criteria such as return on investment or cost-benefit analysis. Incorrect
estimates of costs and benefits are common errors. Approved proposals
implicitly form the substance of the strategy without a strategic design or
architect.

Top-Down Approach:The top-down approach is the most common by far. In it, the CEO and
the Board of Directors, decides on the overall direction the company
should take. The strategy flows down through the organization as each
unit adapts to the new approach.

Collaborative Techniques:Some organizations employ collaborative techniques that surface new


ideas in the process leveraging advances in information technology. It is
felt that knowledge management systems should be used to share
information and create common goals. Strategic divisions are thought to
hamper this process.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 33

Compliance Department:
The department or unit within a brokerage firm, bank or financial
institution that ensures compliance with all applicable laws, rules and
regulations is the compliance department. The compliance department
generally has a wide range of roles and responsibilities within a firm.
Depending on the business of the financial institution, these duties may
range from monitoring trading activity, preventing conflicts of interest and
ensuring compliance with regulations at brokerage firms, to preventing
money laundering and potential tax evasion at large banks.

As a firm's internal police force, the compliance department is unlikely to


be the most popular unit in a firm. However, a competent compliance
department is of the utmost importance in maintaining a firm's integrity
and reputation. Compliance demands for most financial firms increased
regulatory oversight significantly in the wake of the 2008 credit crisis.
This has led to increased demand for experienced compliance staff.

Although compliance costs have spiraled higher in recent years, the


costs of non-compliance - even if inadvertent - can be far greater for a
financial institution. Non-compliance may lead to stiff monetary fines,
legal and regulatory sanctions, and loss of reputation.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 34

FIXED INCOME/MONEY
MARKET DESK

FOREIGN
EXCHANGE/FX DESK
RISK MANAGEMENT
CAPITAL
MARKTS/EQUITES DESK
CORPORATE
TREASURY
PROPREITARY DESK

MIDDLE OFFICE

INTERNAL/FINANCE
CONTROL

ASSET LIABILTY
MANAEGEMENT/ALM
DESK
TRANSFER
PRICING/POOLING
FUNCTION
INDUSTRIAL
ORGANIZATIONAL
APPROACH
SOCIOLOGICAL
APPROACH

CORPORATE
STRATEGY/
STRATEGIC
MANAGEMENT
COMPLIANCE
DEPARTMENT

BOTTOM-UP APPROACH

TOP-DOWN APPROACH

COLLABORATIVE
APPROACH
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 35

BACK OFFICE:The back office services include the nuts and bolts of the investment
bank. While it provides the greatest job security of the divisions within an
investment bank, it is a critical part of the bank that involves managing
the financial information of the bank and ensures efficient capital
markets through the financial reporting function. The staff in these areas
are often highly qualified and need to understand in depth the deals and
transactions that occur across all the divisions of the bank.

The back office jobs are often considered unglamorous and some
investment banks outsource these types of businesses. Nevertheless,
they allow the whole thing to run. Without them, nothing else would be
possible.

The back office provides the support so that the front office can do the
jobs needed to make money for the investment bank.

Typically the back office job includes operations and technology.

Operations:
This involves data-checking trades that have been conducted, ensuring
that they are not erroneous, and transacting the required transfers. It
handles things such as trade confirmations, ensuring that the correct
securities are bought, sold, and settled for the correct amounts. Many
banks have outsourced operations. It is, however, a critical part of the
bank. Due to increased competition in finance related careers, college
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 36

degrees are now mandatory at most Tier 1 investment banks. 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:
Every major investment bank has considerable amounts of in-house
software, created by the technology team, who are also responsible for
technical support. The software and technology platforms that allow
traders to do their job are state-of-the-art and functional, the creation of
new

trading

algorithms,

and

more.

Technology

has

changed

considerably in the last few years as more sales and trading desks are
using electronic trading. Some trades are initiated by complex algorithms
for hedging purposes.

OPERATIONS
BACK OFFICE
TECHNOLOGY

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 37

OTHER BUSINESSES:Other potential divisions that an investment bank may include are: global
transaction banking, commercial banking, merchant banking and
investment management.

Global Transaction Banking:


Global transaction banking is the division which provides cash
management, custody services, lending, and securities brokerage
services to institutions. It is mainly responsible for managing and
developing the flow business with corporate clients and financial
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.
Global transaction services (GTS) consist in a comprehensive range of
commercial banking products and services, mainly addressed to
corporate clients and financial institutions, offered by global transaction
banking units. They include domestic and cross-border payments,
professional risk management and international trade financing.
Each bank, however, offers a different set of products, which can range
from cash management, trade finance, structured trade & export finance,
cash and clearing, and global securities services to supply chain
management. Regardless of the specific banks offer, the common factor
in all transaction services is the ability to support asset-intensive
business by providing cheap and stable funding through both the good
and bad times.
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 38

Commercial Banking:
A commercial bank (or business bank) is a type of financial institution
and intermediary. It is a bank that lends money and provides
transactional, savings, and money market accounts and that accepts
time deposits. A commercial bank is a financial institution that provides
services, such as accepting deposits, giving business loans and auto
loans, mortgage lending, and basic investment products like savings
accounts and certificates of deposit. Commercial banking activities are
different than those of investment banking.

Commercial banks engage in the processing of payments by way of


telegraphic transfer, EFT, internet banking, or other means, issuing bank
drafts and bank cheques, accepting money on term deposit, lending
money by overdraft, installment loan, or other means, providing
documentary and standby letter of credit, guarantees, performance
bonds, securities underwriting commitments and other forms of off
balance sheet exposures, safekeeping of documents and other items in
safe deposit boxes, sales, distribution or brokerage, with or without
advice, of: insurance, unit trusts and similar financial products as a
financial supermarket, cash management and treasury, merchant
banking and private equity financing.

Traditionally, large commercial banks also underwrite bonds, and make


markets in currency, interest rates, and credit-related securities, but
today large commercial banks usually have an investment bank arm that
is involved in the mentioned activities.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 39

Merchant Banking:
Merchant Banking is a combination of Banking and consultancy
services. Merchant banking can be called "very personal banking";
merchant banks offer capital in exchange for share ownership rather
than loans, and offer advice on management and strategy. Merchant
banking is also a name used to describe the private equity side of a firm.

Merchant Bank is a bank that deals mostly in (but is not limited to)
international finance, long-term loans for companies and underwriting.
Merchant banks do not provide regular banking services to the general
public. Merchant banks are intermediaries that provide brokerage, fundraising, and financial advisory services on a large scale to businesses
and a smaller scale to wealthy individuals.

In the United Kingdom, the term "merchant bank" refers to an investment


bank. Both commercial banks and investment banks may engage in
merchant banking activities.

Historically, merchant banks' original purpose was to facilitate and/or


finance production and trade of commodities, hence the name
"merchant". Few banks today restrict their activities to such a narrow
scope. Modern merchant banks offer a wide range of activities, including
issue

management,

portfolio

management,

credit

syndication,

acceptance credit, counsel on mergers and acquisitions, insurance, etc.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 40

Investment Management:
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).
Investment management is a generic term that most commonly refers to
the buying and selling of investments within a portfolio. Investment
management can also include banking and budgeting duties, as well as
taxes. But the term most often refers to portfolio management and the
trading of securities to achieve a specific investment objective.
The provision of investment management services includes elements of
financial statement analysis, asset selection, stock selection, plan
implementation and ongoing monitoring of investments. The investment
management division of an investment bank is generally divided into
separate groups, often known as Private Wealth Management and
Private Client Services. Fund manager (or investment adviser in the
United States) refers to both a firm that provides investment
management services and an individual who directs fund management
decisions.

The largest financial fund managers are firms that exhibit all the
complexity their size demands. Apart from the people who bring in the
money (marketers) and the people who direct investment (the fund
managers), there are compliance staff (to ensure accord with legislative
and regulatory constraints), internal auditors of various kinds (to examine
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 41

internal systems and controls), financial controllers (to account for the
institutions' own money and costs), computer experts, and "back office"
employees (to track and record transactions and fund valuations for up
to thousands of clients per institution).

OTHER BUSINESSES

GLOBAL
TRANSACTION
BANKING

COMMERCIAL
BANKING

MERCHANT
BANKING

INVESTMENT
MANAGEMENT

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 42

TYPES OF INVESTMENT BANKS:-

Full-Service Global Investment Banks:


Full-Service Global Investment Banks are large institutions who provide
a complete set of services to their clients with top expertise in most
areas, and who operate on a global basis. These are investment banks
that serve large corporates, usually multi-national Companies. A fullservice investment bank, by definition, offers corporate clients a pool of
services, including raising capital in both public and private markets,
trading securities, and managing corporate mergers and acquisitions.

Regional Investment Banks:


Regional investment banks differ from full-service banks in exactly the
manner in which their name implies their operations are concentrated in
a particular region. Regional Investment Banks are focused in a specific
area with specialized geographic knowledge and a variety of product
offerings. These firms are also known as Specialty Investment Banks.

Boutique Investment Banks:

Boutiques are much smaller firms who specialize in a particular product


or industry. Boutiques are often started by successful bankers who leave
the larger firms with their extensive networks for the prestige and money
associated with their own firm.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 43

Boutique firms are small investment banks organized at local level and
specialize in a particular industry or product. They are independent firms
whose focus is on advisory services such as M&A. Because of their
expertise, they are better advisors in particular deals. They provide
personalized services to their clients and try to be more of partners
rather than merely being advisors.
These firms may specialize by industry, client asset size, banking
transaction type or by other factors to address a market not well
addressed by larger firms. Although they may lack some of the
resources of larger firms, boutique firms aim to offer more individualized
services and tailor their offerings to the needs of their clients.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 44

SWOT ANALYSIS OF THE INVESTMENT BANKS: STRENGTHS: Strong Management:


Strong management can help Investment banks reach its potential by
utilizing strengths and eliminating weaknesses. Strong Management has
a significant impact, so an analyst should put more weight into it.

Cost Advantages:
Lower costs lead to higher profits for the Investment banks. A low cost
leader can undercut rivals on price.

Economies of Scale:
Economies of scale are the cost advantages that the investment bank
obtains due to size. The greater the volume, the greater the advantages
it has.

Unique Products:
Unique products help distinguish Investment banks from its competitors.
Investment banks can charge higher prices for their products, because
consumers cant get those products elsewhere.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 45

Brand Name:
A strong brand name is a major strength of the Investment banks. This
gives the investment banks the ability to charge higher prices for their
products because consumers place additional value in the brand.

Technology:
Superior technology allows Investment banks to better meet the needs
of their customers in ways that competitors cant imitate.

Proficient Employees:
The major strength of any sector is its employees. In Investment
banking, all the work is done by professionals because it requires skillful
and specialized knowledge about the subject matter.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 46

WEAKNESSES: Outdated Technology:


A lack of proprietary technology and patents can hurt the investment
banks ability to compete against rivals.

High Debt Burden:

A high debt burden increases the risk that the investment bank goes
bankrupt if they make a poor business decision. Increasing risks can
increase investment banks debt interest payments.

Cost Structure:
A weak cost structure means the investment banks costs are high in
comparison to its competitors.

Lack of Scale:
A lack of scale means that the investment banks cost per unit of output
is very high. Increasing volume, while maintaining the quality, would help
reduce those costs.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 47

OPPORTUNITIES: Innovation:
Greater innovation can help the investment banks to produce unique
products and services that meet customers needs.

New Services:
New services help the investment banks to better meet their customers
needs. These services can expand the investment banks business and
diversify their customer base.

Emerging Markets:
Emerging markets are fast growing regions of the world that enable the
investment banks to quickly expand.

New Technology:
New technology helps the investment banks to better meet their
customers needs with new and improved products and services.
Technology also builds competitive barriers against rivals.

New Products:
New products can help the investment banks to expand their business
and diversity their customer base.
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 48

International Expansion:
International markets offer the investment banks new opportunities to
expand the business and increase sales.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 49

THREATS: Intense Competition:


Intense competition can lower the investment banks profits, because
competitors can entice consumers away with superior products. Intense
Competition has a significant impact, so an analyst should put more
weight into it.

Bad Economy:

A bad economy can hurt the investment banks business by decreasing


the number of potential customers.

Competition:
Competition in the investment banking is increasing day by day. New
players are foraying to the market due to this market share of each
existing company is getting affected and profits as well. Competitors are
numerous and difficult to combat, hence the investment banks should
always try to increase their share in the market.

Political Risk:
Politics can increase the investment banks risk factors, because
governments can quickly change business rules that negatively affect
the investment banks business.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 50

Government Regulations:
Changes to government rules and regulations can negatively affect the
investment banks.

Substitute Products:
The availability of substitute products hurts the investment banks ability
to raise prices, because customers can easily switch to another product
or service.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 51

POSSIBLE CONFLICTS OF INTEREST:Potential conflicts of interest may arise between different parts of a bank,
creating the potential for financial movements that could be market
manipulation. Conflicts of interest may also arise between different parts
of a bank, creating the potential for market manipulation, according to
critics. Authorities that regulate investment banking (the SEC in the
United States, the SEBI in India) require that banks impose a Chinese
wall which prohibits communication between investment banking on one
side and research and equities on the other.

Many investment banks also own retail brokerages. Also during the
1990s, some retail brokerages sold consumers securities which did not
meet their stated risk profile. This behavior may have led to investment
banking business or even sales of surplus shares during a public
offering to keep public perception of the stock favorable.

Since investment banks engage heavily in trading for their own account,
there is always the temptation or possibility that they might engage in
some form of front running-the illegal practice whereby a broker
executes orders for their own account before filling orders previously
submitted by their customers, there benefiting from any changes in
prices induced by those orders.

Investment banking has also been criticized for its opacity. Investment
banking is often criticized for the enormous pay packages awarded
those who work in the industry.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 52

WHAT TO LOOK FOR IN AN INVESTMENT BANK / AN


INVESTMENT BANKER?
The investment banker has a vested interest in making sure the
transaction closes, that the project is completed in an efficient time
frame, and with terms that provide maximum value to the client. At the
same time, the Client is able to focus on running the business, rather
than on the day-to-day details of the transaction, knowing that the
transaction is being handled by individuals with experience in executing
similar projects.

Investment banking is a service business, and the client should expect


top-notch service from the investment banking firm. Generally only large
client firms will get this type of service from the major Wall Street
investment banks; companies with less than about $100 million in
revenues are better served by smaller investment banks.

Some criteria to consider include:

Services Offered:
For all functions except sales and trading, the services should go well
beyond simply making introductions, or "brokering" a transaction. For
example, most projects will include detailed industry and financial
analysis, preparation of relevant documentation such as an offering
memorandum or presentation to the Board of Directors, assistance with
due diligence, negotiating the terms of the transaction, coordinating
legal, accounting, and other advisors, and generally assisting in all
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 53

phases of the project to ensure successful completion which is done by


the investment banker.

Experience:
It extremely important to make sure that experienced, senior members of
the investment banking firm will be active in the project on a day-to-day
basis. Depending on the type of transaction, it may be preferable to work
with an investment bank that has some background in your specific
industry segment. The investment bank should have a wide network of
relevant contacts, such as potential investors or companies that could be
approached for acquisition.

Record of Success:
Although no reputable investment bank will guarantee success, the firm
must have a demonstrated record of closing transactions.

Ability to Work Quickly:


Often, investment banking projects has very specific deadlines, for
example when bidding on a company that is for sale. The investment
bank must be willing and able to put the right people (the BEST
investment bankers) on the project and work diligently to meet critical
deadlines.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 54

Fee Structure:
Generally, an investment bank and the investment banker as well, will
charge an initial retainer fee, which may be one-time or monthly, with the
majority of the fee contingent upon successful completion of the
transaction. It is important to utilize a fee structure that aligns the
investment bank's incentive with your own.

Ongoing Support:
Having worked on a transaction for your company, the investment bank
will be intimately familiar with your business. After the transaction, a
good investment bank should become a trusted business Advisor that
can be called upon informally for advice and support on an ongoing
basis.

Because investment banks are intermediaries, and generally not


providers of capital, some executives elect to execute transactions
without an investment bank in order to avoid the fees. However, an
experienced, quality investment bankers service adds significant value
to a transaction and can pay for its fee many times over.

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 55

TOP 10 INVESTMENT BANKS:World's biggest banks are ranked for M&A advisory, syndicated loans,
equity capital markets and debt capital markets.

The ten largest global investment banks as of December 31, 2010, are
as follows (by total fees):

RANK

COMPANY

FEES ($M)

1.

J.P. Morgan

$5,533.85

2.

Bank of America Merrill Lynch

$4,581.59

3.

Goldman Sachs

$4,386.52

4.

Morgan Stanley

$4,055.48

5.

Credit Suisse

$3,379.12

6.

Deutsche Bank

$3,286.80

7.

Citi

$3,238.67

8.

Barclays

$2,864.44

9.

UBS

$2,614.44

10.

BNP Paribas

$1,433.89

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 56

CONCLUSION:Investment banking is a field of banking that aids companies in acquiring


funds. In addition to the acquisition of new funds, investment banking
also offers advice for a wide range of transactions a company might
engage in. Traditionally, banks either engaged in commercial banking or
investment banking. In commercial banking, the institution collects
deposits from clients and gives direct loans to businesses and
individuals.

Investment banking is a particular form of banking which finances capital


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

Historically, the investment banking industry has enjoyed unusually high


profits due to formidable barriers to entry. Factors such as technology,
deregulation, and improper behavior have eroded these barriers. The
industry now faces new entrants in the market which threatens the
profitability of incumbent firms. Significant strategic actions are required
in order for these existing firms to sustain their profitability.

The Investment Banking industry is come of age and is now growing by


leaps and bounds. Investment banking companies in India has joined
hands with global majors to adapt to global standards and also to
collaborate to work on cross border transactions and participate in
international offerings. Thus, investment banking can be quoted as
Investment Banking the financial facilitator of market driven capitalism
and the economic catalyst of national and international development
ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 57

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BOOKS:
Investment Banking Concepts, Analyses and Cases
By Pratap. G. Subramanyam
CFM-McGraw-Hill Professional Series in Finance

ROLE OF THE INVESTMENT BANKERS IN THE FINANCIAL SYSTEM (TYBFM) Page 60

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