Consider Banking Products and Services and Different Types of Banks (Investment Bank and Commercial Bank)

Consider banking products and services and different types of
banks
(Investment Bank and Commercial Bank)
1. Different type of client:

a) Investment Bank:
Big investment banking clientele can vary depending on the scope of need or based on
client. Investment banking clientele includes:
 Large Companies
 Corporations
 Institutional Investors (with are invests like pension funds and mutual funds)
 High Net Worth Individuals (who really rich, above the millionaire mark)
 Governments
Some example of investment banks might include Evercore and Morgan Stanley and they
tend to have offices all across the main financial cities like London, New York or Hong
Kong.
b) Commercial Bank:
The clientele of commercial banks primarily comes from regular people using
personal checking and savings account, or through personal loans. In addition,
commercial bank also supports small and middle-market business clients with daily
banking and credit needs, including working capital and growth-related financing.
Some examples of these banks are Capil One in the US and NatWest in the UK.
The customer base of commercial banks is higher than the investment banks. Because
commercial banks are the bank to all the citizens of the country the client base of this
bank is wide.
To sum up, investment banks typically deal with larger transactions and they satisfy
capital requirements with public issuances. On the other hand, commercial banks
support smaller financing needs for mostly non-public, corporate borrowers.
2. Services offered by Commercial and Investment Banks

 Commercial banks
For commercial banks one of the main services is accepting deposits, so if I make
some money I might leave it there. And secondly taking out loans. So it could be a loan
for a mortgage, a car or whatever.
They also provide some more secondary services such as credit cards and
exchanging foreign currencies.
 So it’s really quite simple on the whole.
 Investment Banks
On the other hand, for investment banks, they offer two main services: advisory
and financing.
- Advisory consists of things like whether they should your business merge or
acquire another company (called M&A), should you restructure your business
because its not doing very well, and other things along those lines.
- Financing mainly consists of raising money through the financial markets for
clients. Examples include an IPO (initial public offerings, which is the first
time a company sells its shares to the public markets) as well as bond offerings.
Some other services include trading income, which they generate by either trading
with other people's money (basically their clients) or their own money (known as
proprietary trading), as well as doing economic research.
 The services of investment banks are far more complex and are a lot more
personalized.
 The world's largest Commercial and Investment banks
Since the turn of the century, Indian and Chinese banks, including Commercial
Banks, have grown significantly. Today they represent almost half of the world's top 10
largest banks. In 1980, they didn't even appear in the top 20.
Very few banks today are stand- alone Investment Banks. Most are bolted onto the
side of giant financial institutions that are also major Commercial Banks.
 HOW COMMERCIAL BANKS MAKE MONEY?
Commercial banks make money by providing and earning interest from loans such as
mortgages, auto loans, business loans, and personal loans. Customer deposits provide
banks with the capital to make these loans with an interest rate above what they pay to
depositors.
For an example: Suppose this depositor has been paid $1000 dollars this month. She’s
putting the money in the bank. In turn, the bank pays her 2% for trusting them with the
money. So what does the bank do with that $1000? They decide to lend it out to
somebody that needs it. In this case, this person wants to borrow $1000 dollars. Maybe
it’s to pay for a car or whatever. He has to pay the bank a 5% interest rate. So the
difference between what the bank pays in interest and what it gets in interest (the interest
income with the interest expense is what gives them the 3% spread). And that’s how they
make their money.
As I mentioned earlier, they also have other services like currency exchange and
credit cards, where they also take fees.
 HOW INVESTMENT BANKS MAKE MONEY?

Investment banks mainly earn money by charging fees and commissions.
For example: Suppose company A wants to sell its shares to the public market because
it’s short in cash. Let’s say that’s 10M shares. The investment bank will underwrite all
the shares. That means that they pledge to buy all the unsold shares. So they take on the
risk for those 10M shares. So the bank takes these shares and asks for a price for all the
investors in the market. After that, they agree to a $25 price per share.
So for company A, that’s 250M dollars. As for the investment bank, let’s say they charge
a 3% fee, so they have made 7.5 million dollars through this transaction. And that is one
of the main ways they make money.
They may also get fees for selling bonds, derivatives, and other financial
instruments. And as I mentioned earlier they might have advisory fees, so they might take
a fee for giving out that advice, that one thing. For trading, they either take a fee for
managing that money or they might take a percentage of the profits as well. And then
lastly for economic research, they are basically going to sell those research papers
Finnally, the bank risk and regulation will be presented by My Linh
3. Risk & Regulation for Commercial and Investment Banks

 Commercial banks
The risk: Commercial banks are among the major financial intermediaries in the
marketplace. As a result of this role, commercial banks are exposed to the risks that affect
both the securities markets and the economic conditions that affect consumers. To
understand the risks associated with commercial banks, it is helpful to consider some key
areas that affect banking operations.
1. Interest Rate Risk

Interest rate risk is one of the more prevalent risks for commercial banks. As a result,
commercial banks try to hedge their loans against any changes in the general interest rate
level in the economy.
2. Default Risk
Commercial banks generally make most of their money on loans. Although banks screen
borrowers and analyze their financial position and ability to pay, commercial banks are
still susceptible to borrower default, widespread borrower default may jeopardize the
solvency of a commercial bank.
Regulation: Commercial banks are also subject to regulation. Depending on the type of
bank, specialization and state in which they operate, commercial banks work within a
framework of legal regulation. When regulations change, the bank's operational
framework changes, which may impact its ability to generate profits from loans.
 Investment banks
1. Market risk
Market risk, also known as macro risk, is unavoidable and, therefore, of the utmost
concern for investment banks. Market risk can be defined as the risk of loss due to
variables in the market. The variables include exchange rates, inflation, and interest rate
risk.
2. External risk factors

Exterior risk factors, such as credit risks, occur primarily when an investment bank
fulfills the role of intermediary for over the counter (OTC) trades. To manage the risk,
banks must make the loan selection process fairly rigorous; only the most qualified
candidates should be offered funding.
Regulation
Commercial banks and investment banks don't have the same regulation.
In terms of risk, a commercial bank has much lower risk exposure. Basically, the
government regulations that the commercial banks must adhere to make them less prone
to risk. Additionally, when you deposit your money in a savings account, not expecting to
get rich with it, but rather that it's secure there.
In contrast, investment banks are paid to create value for their customers by taking higher
risks. Customers come to them to find investors and capital, so the nature of the business
and the looser regulations makes them riskier.

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Consider Banking Products and Services and Different Types of Banks (Investment Bank and Commercial Bank)

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Consider banking products and services and different types of

(Investment Bank and Commercial Bank)

1. Different type of client:

2. Services offered by Commercial and Investment Banks

 HOW INVESTMENT BANKS MAKE MONEY?

Finnally, the bank risk and regulation will be presented by My Linh

3. Risk & Regulation for Commercial and Investment Banks

1. Interest Rate Risk

2. External risk factors

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