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Queconomics – There are several reasons why investment banks are different from commercial banks. The two banks perform several different functions and regulations, of course, in the economic field, but both have almost the same services as their respective clients.
Commercial banking offers their client a variety of loan and deposit services. Meanwhile, investment banking offers securities underwriting, management of investment, and securities trading services.
However, you can find banks that offer both services; investment and commercial banking services. There are differences between features, services, functions, etc.
Why investment bank different is because it offers services to big corporations. They also offer several services for investment to individuals and small business.
Investment banks have very important tasks such as helping companies to conduct IPOs and also helping startups or companies to get funding. This bank issues company shares and acts as agents.
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They also have other duties, namely assisting the acquisition process as well as inter-company mergers and divestitures. Investment banks also maintain investments in mutual and hedge funds, pension funds and investment groups.
Once they deposit their funds, the bank will invest it in either securities, stocks, or other profitable investment vehicles. This is done to increase the amount they have deposited in the bank.
Why Investment Bank is Different
Being the main division in the bank industry, both banks has several differences. They have the differences in the securities trading.
The commercial ones offer different services, including the deposit maintenance and loan offerings, however, they don’t do the securities trading.
Securities trading, on the other hand, is the main business for the investment banking. They help with underwriting services, handling IPO, investment, securities trading, as well as acquisition and merger services.
Both banks also have different customers or clients. Commercial bank customers include businesses and individuals, whereas investment bank customers include individual investors, large corporations, group investors, governments, etc.
Investment banks are more loosely regulated by the SEC (Securities and Exchange Commission). SEC offers the customers less protection and gives the bank a significant operational freedom.
Investment banks gain a higher tolerance and exposure to risk due to the comparative weakness of government regulations, along with specific business models. Meanwhile, commercial banks have a much lower risk threshold.
It has an implicit obligation to act in the best interests of their clients. A higher level of government control over commercial banks also reduces the level of risk tolerance.
Main Role of Investment Bank
One of the main roles of investment banks is to act as an intermediary between companies and investors through an initial public offering (IPO). This is why investment bank is not the same as general or commercial bank.
Investment banks provide underwriting services to issue new shares when a company decides to go public and seek equity funds.
Underwriting basically involves banks with each other in terms of investment, which buys a number of new shares which will be mutually agreed upon, which will then be resold through the stock exchange in accordance with the regulations.
Part of an investment bank’s job is to evaluate companies and determine a fair price to offer common stock. IPOs, especially for large companies, generally involve more than one investment bank.
In this way, underwriting risk is spread across multiple banks, reducing single bank exposure and requiring relatively low financial commitments to the IPO. Investment banks also act as underwriters for corporate bonds.
In addition to bridging companies to conduct IPOs, investment banks also have the task of being financial advisors to their clients and accommodating the activities of company mergers and acquisitions as mentioned above.
Seeing its role, it is enough to be able to distinguish between investment and commercial banks. That is the reason why investment bank is different from commercial banks in terms of their duties and risks.