Investment Banking Flashcards
What are the main issues surrounding investment banks?
- Make high profits
- Pay high bonuses
- Conflicts of interest
- Excessive risk taking
- Financial innovation they promote (systemic risk)
What are the corporate activities of an investment bank?
Involves providing direct services to firms. Includes:
- advice on financing and raising funds
- mergers, acquisitions and restructuring
- risk management
- provide loans to companies
- privatisations
How do investment banks provide advice on financing and raising funds? (corporate activity)
Help find the best financing option for the company through their knowledge of financial instruments and securities. They help companies issue new shares and bonds which is supported by providing an underwriting service.
What does underwriting mean in investment banking?
A guarantee by the investment bank that all unsold shares will be bought by them.
How do investment banks help companies with mergers, acquisitions and restructuring? (corporate activity)
They all require in depth knowledge and research of the company and the market which the investment bank will have the resources to conduct.
How do investment banks help companies with risk management? (corporate activity)
Risk management is at the core of all investment banking activities. They put proper safety nets in place by using their experience of financial securities. They have more knowledge of what could go wrong than the company.
How do investment banks provide loans to companies? (corporate activity)
Often provide loans to companies at a loss to help build a relationship and secure more profitable deals with the company in the future. Investment banks are also often part of universal banks so can offer advantageous loans.
How do investment banks help companies with privatisations? (corporate activity)
Advise state run companies on how to issue initial public offerings (IPO) of shares in public sector organisations
What are the market activities of an investment bank?
Activities provided in the service of markets or on behalf of corporations who have to interact with financial markets or direct investment activities into financial markets. Includes:
- Brokerage
- Market maker
- Proprietary trading
- Wealth and asset management
- Venture capital investment
What does brokerage involve? (market activity)
Buying securities on behalf of someone else.
Investment banks broker large amounts of securities for institutional investors like pension funds.
What does corporate brokerage involve?
Providing information on market conditions, help maximise interest rate returns by acting on the company’s behalf and advising on regulation. This can be a loss generating activity.
What does an investment bank acting as a market maker involve? (market activity)
Quoting a price at which you would buy (bid) and simultaneously as price at which you would sell (ask).
Market maker hopes to buy securities at a low bid price and sell at a high ask price.
What does proprietary trading involve for an investment bank? (market activity)
Uses bank’s capital to make profits.
Trading stocks, bonds, currencies, commodities etc with the firm’s own money.
Often investment banks use borrowed money or money from issuing bonds.
Why do regulators have an issue with proprietary trading?
There is a risk of domino effect:
Bankruptcy of one bank causes them to default on their loans which could cause another bank to have financial difficulties.
How do investment banks help with wealth and asset management? (market activity)
Help high net worth individuals manage their wealth and investments. Their knowledge in diversifying risk, investing in financial markets and tax regulations are of use to the individual.
