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Encyclopedia > Investment bank

Investment banks 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. They also act as intermediaries in trading for clients. 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 structures have blurred, especially as commercial banks have offered more investment banking services. In the US, the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1998. Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world. A corporation is a legal person which, while being composed of natural persons, exists completely separately from them. ... The capital market (securities markets)is the market for securities, where companies and the government can raise long-term funds. ... Ownership equity, commonly known simply as equity, also risk or liable capital, is a financial term for the difference between a companys assets and liabilities -- that is, the value that accrues to the owners (sole proprietor, partners, or shareholders). ... In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon). ... This page deals with the combination of two companies into one. ... The phrase mergers and acquisitions (M&A) refers to the aspect of business strategy and management dealing with the merging and/or acquiring of different companies. ... A commercial bank is a type of financial intermediary and a type of bank. ... Two separate laws are known as the Glass-Steagall Act. ... The 1929 stock market crash devastated economies worldwide The Wall Street Crash refers to the stock market crash that occurred on October 29, 1929, when share prices on the New York Stock Exchange collapsed, leading eventually to the Great Depression. ... The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. ... 1998 (MCMXCVIII) was a common year starting on Thursday of the Gregorian calendar, and was designated the International Year of the Ocean. ... This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ...

Contents


Definitions

There appears to be considerable confusion today about what does and does not constitute an "investment bank" and "investment banker". In the strictest definition, investment banking is the raising of funds, both in debt and equity, and the name of the division handling this in an investment bank is often called the "Investment Banking Division" (IBD). However, only a few small boutique firms solely provide this - such as Greenhill, with almost all investment banks heavily involved in providing additional financial services for clients such as the trading of fixed income, foreign exchange, commodity and equity securities. It is therefore acceptable to refer to both the "Investment Banking Division" and other 'front office' divisions such as "Fixed Income" as part of "investment banking", and any employee involved in either side an "investment banker". For other uses, see Debt (disambiguation). ... The Court of Chancery, London, early 19th century This article is about concept of equity in Anglo-American jurisprudence. ... Greenhill is the name of several places in the United Kingdom: Greenhill, County Durham, England Greenhill, Dorset, England Greenhill, Herefordshire, England Greenhill, Kent, England Greenhill, Lancashire, England Greenhill, Leicestershire, England Greenhill, London, England Greenhill, Sheffield, England Greenhill, Evesham, Worcestershire, England Greenhill, Kidderminster, Worcestershire, England Greenhill, Dumfriesshire, Scotland Greenhill, Lanarkshire, Scotland... Fixed income refers to any type of investment that yields a regular (fixed) payment. ... Foreign exchange has several meanings: In telecommunications, Foreign exchange service is a type of network service. ... The word commodity is a term with distinct meanings in business and in Marxian political economy. ... A stock, also referred to as a share, is commonly a share of ownership in a corporation. ...


More commonly used today to characterize what was traditionally termed "investment banking" is "sell side". This is trading securities for cash or securities (i.e., facilitating transactions, market making), or the promotion of securities (i.e. underwriting, research, etc.). In banking, underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower, such as employment history, salary, and financial statements; publicly available information, such as the borrowers credit history, which is detailed in a credit report; and the lender...


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. Some firms have both buy and sell side components.


Raising capital in the capital markets

The main activities and units

Large, global investment banks typically have several business units, including Investment Banking, concerned with advising public and private corporations; Research, concerned with producing reports on valuations of financial products; and Sales and Trading, concerned with buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through Proprietary Trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet.


An investment bank is split into the so-called Front Office, Middle Office and Back Office. The individual activities are described below:


FRONT OFFICE

  • Investment Banking, is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction. Once mandated, an investment bank is responsible for 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. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance.
  • Financial Markets is split into four key divisions: Sales, Trading, Research and Structuring.
    • Sales and Trading, is often the most profitable area of an investment bank, responsible for the majority of revenue of most investment banks. In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.
    • Research, is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank.
    • Structuring has been a relatively recent division 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.

MIDDLE OFFICE A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the spread (i. ... It has been suggested that caveat venditor be merged into this article or section. ... A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather...

  • Risk Management involves analysing the 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.

BACK OFFICE

  • Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. Whilst it provides the greatest job security of divisions within an investment bank, it is widely known to involve the most monotonous work at relatively low pay [1].
  • Technology - Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support.

Size of industry

Global investment banking revenue increased for the third year running in 2005 to $52.8bn. This was up 14% on the previous year but 7% below the 2000 peak. The recovery in the global economy and capital markets resulted in an increase in M&A activity which has been the primary source of investment banking revenue in recent years. There was a decline in revenue between 2000 and 2002 caused by the adverse economic conditions, and a sharp fall in equity markets.


The US was the primary source of investment banking income in 2005 with 51% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 31% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 18%. Between 2002 and 2005, fee income from Asia increased by 98%. This compares with a 55% increase in Europe and 46% increase in the US during this period. [2]


Recent evolution of the business

Investment Banking is one of the most global industries, and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout Investment Banking history, many have theorized that all investment banking products and services would be commoditized. However, new products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these cannot be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins. For example, trading bonds and equities for customers is now a commodity business, but structuring and trading derivatives is highly profitable. Each contract has to be uniquely structured to match the client's need, may involve complex pay-off and risk profiles, and is not listed on any market. In addition, while many products have been commoditized, an increasing amount of investment bank profit has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients). A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather...


Vertical Integration Another trend in Investment Banking that has occurred during the dawn of the 21st century has been the vertical integration of debt securitization. What this means is that previously, investment banks had historically assisted lenders in raising more lending funds and having the ability to offer longer term fixed interest rates by converting the lenders outstanding loans into bonds. For example, a mortgage lender would make a house loan, and then use the investment bank to sell bonds to fund the debt, the money from the sale of the bonds can be used to make new loans, while the lender accepts loan payments and passes the payments on to the bondholders. This process is called securitization. However, lenders have begun to securitize loans themselves, especially in the areas of mortgage loans. Because of this, and because of the fear that this will continue, many Investment Banks have focused on becoming lenders themselves, making loans with the goal of securitizing them. In fact, in the areas of commercial mortgages, many Investment Banks lend at loss leader interest rates in order to make money securitizing the loans, causing them to be a very popular financing option for commercial property investors and developers.


Compensation - UK

Investment Bankers receive the highest starting salary of any graduate-level job in the United Kingdom[3] - whilst the average starting salary for graduates in the top 100 AGR blue-chip firms is £23,000[4] (and closer to £15,500 for all graduates according to Prospects.co.uk), investment banking graduates can enjoy a starting salary of £35,000 - on top of this, a £5,000 "golden handshake" is typical, with an end-of-year bonus up to a further £30,000 for some 'front office' divisions. This puts a year-one salary for potentially a 21/22 year old at £70,000 - 4.5 times the average for a graduate. Whilst the £35,000 base salary only rises by four figures annually, bonuses for the best performers rises exponentially, being many multiples the size of their base salary, so that many in Corporate Finance, Trading and Sales can expect six-figure pay packages in their 3rd year, when promoted to Associate level.


Graduates with a Bachelors or Masters degree begin as Analysts on around £35,000 base salary, those with PhDs or MBAs but no experience begin as Senior Analysts on around £45,000 and those with MBAs and prior experience begin as Associates on around £60,000 (and six-figures when including a bonus). At the upper end, most Managing Directors expect a seven-figure salary.


Compensation for bankers who work in the Sales & Trading division varies much more than in actual investment banking. Because compensation is closely attached to the profit generated by each trader, a star Associate with a good relationship with his/her Managing Director can sometimes earn more than other (presumably less profitable) Managing Directors at the Firm. Those involved in the more complex, structured Derivatives side tend to earn more than those involved in flow products, due to the considerably higher profit margins of using financial "Options".


Compensation - USA

Unlike the UK, corporate law competes with banking to be the highest-paying graduate job in USA, with potential six-figure starting salaries for both sectors on par with one another. Investment bankers are compensated through a base salary that is paid through the year and a large year-end bonus, in July for junior bankers and in November for senior bankers. In the United States recent graduates, typically of top universities, are hired to fill analyst positions and are commonly paid for their first year a $60,000 salary, a $10,000 sign-on bonus, and a bonus that ranges with the reputation and the profitability of the firm but is usually between $65,000 to $85,000. The base salary increases about $10,000 a year and the size of the bonus increases by about $20,000 a year for analysts. Although the analyst contract expires after 2 years, the best analysts are asked to stay on for a third year, and can be promoted to the Associate level after the 3rd year. MBA graduates usually start at the Associate level. Associate salaries start with a $95,000 base salary, a sign-on bonus, and expected bonus of around $100,000. Vice presidents usually command all-in compensation of half a million dollars. Bankers more senior get paid according to the revenue they produce, but a typical managing director earns $1.5-$2.0 million while a group head might earn $3.0 million to over $10.0 million.


Bonuses vary greatly by the economic cycle. For example, in 2002 and 2003, bonuses for first year analysts ranged from $10,000 to $25,000, while in 2005 the bonus range was from $40,000 to $65,000 for first year analysts. In 2006, the median bonus is projected to be $80,000 for first year analysts, $100,000 for second year analysts, and $120,000 for third year analysts. The difference is more substantial the more senior the banker.


It is also interesting that most big banks, like Goldman Sachs and Morgan Stanley, pay lower bonuses than the rest because a short tenure at one of these can drastically increase a banker's value to future employers. Bankers who work outside the major financial centers such as London and New York typically earn significantly smaller bonuses for various reasons, including lower profitability of operations, lower cost of living, and in the case of a branch office, the geographic distance from key individuals at head office who may divert money to compensate their own employees. The Goldman Sachs Group, Inc. ... Morgan Stanley NYSE: MS is an investment bank, retail broker, and credit card provider with headquarters in New York Citys Times Square. ... London is the capital city of England and of the United Kingdom, and is the most populous city in the European Union. ... Official language(s) None, English de facto Capital Albany Largest city New York City Area  Ranked 27th  - Total 54,520 sq mi (141,205 km²)  - Width 285 miles (455 km)  - Length 330 miles (530 km)  - % water 13. ...


The big picture of compensation is that ultimately about 50% of total revenues is paid out as compensation to employees (Lazard Freres PLC goes as far as setting a target level for compensation as 57.5% of total revenue). In their 3Q 2005 earnings release, Goldman Sachs earmarked an average of $420,000 per employee per year for compensation (this averages everyone from janitors to the CEO, which would in practical terms have very wide variation). Partners at Goldman Sachs can make well over $2 million before bonuses, with some stars receiving total compensation over $30 million. [5]


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 deemed as market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between Investment Banking on one side and Research and Equities on the other. The Financial Services Authority (FSA) is an independent non-departmental public body and quasi-judicial body that regulates the financial services industry in the United Kingdom. ... In business, a Chinese wall is a means used to make sure that different parts of the firm are kept separate so that information does not circulate freely and to prevent conflicts of interest. ...


Some of the conflicts of interest involved in investment banking are listed here:

  • Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble.
  • 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.

Front Running is the unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information. ...

Investment banks

Some notable public and private investment banks include:

ABN AMRO (Euronext: AAB, (NYSE: ABN)) is the largest bank in the Netherlands and has operations all over the world, its history going back to 1824. ... This article needs to be cleaned up to conform to a higher standard of quality. ... Barclays Capital is the investment banking division of Barclays Bank plc. ... The Bear Stearns Companies, Inc. ... Bank of Montreal TSX: BMO NYSE: BMO is Canadas fifth largest and the oldest chartered bank. ... BNP Paribas (Euronext: BNP, TYO: 8665 ) is one of the main banks in Europe and France. ... Categories: Possible copyright violations ... Calyon (Official name :Calyon Corporate and Investment Bank) is the corporate and investment banking subsidiary of the Crédit Agricole (CA) banking group, serving clients both in its core market in France and abroad. ... Cantor Fitzgerald Securities is an investment bank specializing in bond trading. ... Cazenove is a British stockbrokers, founded in 1823, with a long, illustrious history. ... Citigroup Inc. ... CIBC World Markets, is the investment banking division of the Canadian Imperial Bank of Commerce. ... The Credit Suisse Group is a financial services company, headquartered in Zürich, Switzerland. ... Deutsche Bank AG NYSE: DB (German for German Bank) is a multinational bank operating worldwide and employing almost 64,000 people (Dec. ... // Dresdner Kleinwort is the investment bank of Dresdner Bank AG, part of Allianz since July 2001. ... The Goldman Sachs Group, Inc. ... HSBC Holdings plc (LSE: HSBA, SEHK: 005, NYSE: HBC, Euronext: HSBC, BSX: 1077223879) is one of the largest banking groups in the world, ranked the fifth-largest company and third-largest banking company in the world in Forbes Global 2000. ... Categories: Possible copyright violations ... J.P. Morgan Chase & Co. ... Lazard LLC (NYSE: LAZ) is a New York-based, independent investment bank with more than 2,500 employees in Asia, North America, and Europe. ... Lehman Brothers Holdings, Inc. ... Macquarie Bank Limited is an Australian merchant bank and financial services group, providing a broad range of products and services to investors, corporations and government. ... Merrill Lynch & Co. ... Mizuho Corporate Bank, Ltd. ... Morgan Stanley NYSE: MS is an investment bank, retail broker, and credit card provider with headquarters in New York Citys Times Square. ... Founded in 1981, Newbury Piret is one of New England’s leading investment banking firms. ... The Nomura Group (野村グループ; Nomura gurūpu) is an international conglomerate of financial services and consulting companies, headquartered in the Nihombashi district of Tokyo, Japan. ... Piper Jaffray is a US boutique investment banking firm based in Minneapolis, Minnesota and is a focused on delivering financial advice, investment products and transaction execution within targeted sectors of the financial services marketplace. ... The Royal Bank of Canada (TSX: RY, NYSE: RY) is Canadas largest chartered bank. ... Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, United Kingdom, Germany and China. ... N. M. Rothschild and Sons is the investment bank company of the Rothschild family. ... Founded in Halifax, Nova Scotia in 1832, the Bank launched its branch banking system by opening in Windsor, Nova Scotia. ... Société Générale (Euronext: GLE) is one of the main banks in France (one of the three oldest). ... The Toronto-Dominion Bank TSX: TD NYSE: TD TYO: 8640 is the second largest Canadian bank with over 52,000 employees in offices around the world. ... UBS AG (NYSE: UBS; SWX: [1]; TYO: 8657 ) is a financial services company, headquartered in Basel and Zürich, Switzerland. ... Categories: Stub | Fortune 500 companies | Financial services companies of the United States ...

See also

The First Provincial Bank of Taiwan in Taipei, Republic of China was formerly the central bank of Taiwan Province and issued the New Taiwan dollar. ... Primary dealers are banks or brokerage firms who may trade directly with the Federal Reserve System. ... Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. ... Thomson Financials standard league tables are rankings of Investment Banks in terms of the dollar volume of deals they work on. ... In banking, underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower, such as employment history, salary, and financial statements; publicly available information, such as the borrowers credit history, which is detailed in a credit report; and the lender...

External Links

  • Investment Banking A concise, illustrated guide to investment banking.
  • Summer Investment Bank Programs For Australian Undergraduates

  Results from FactBites:
 
Investment banking - Wikipedia, the free encyclopedia (2539 words)
Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds.
In the strictest definition, investment banking is the raising of funds, both in debt and equity, and the division handling this in an investment bank is often called the "Investment Banking Division" (IBD).
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.
Investment Bank Links (2029 words)
A subsidiary of Bank of Montreal, BMO Nesbitt Burns is a full-service investment bank serving the financial needs of individual, institutional, corporate and government clients.
Founded in 1869, it is among the oldest and the largest of the U.S.-based investment banks and recently completed their IPO in 1999.
TWP is a merchant bank providing investment banking, institutional brokerage, private client services and private equity investing focused on the new frontiers of the growth economy.
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