The Increasing Importance of Investment Banks

There are two kinds of banks – commercial banks and investment banks. Commercial banks are the kind of banking institutions that the general public is most aware. These are the places where individuals keep their money and save their money. However, in the 21st-century the other kind of bank, investment banks, have taken on greater importance. To explain why investment banks are essential, we must first understand what this kind of bank is.

What is an Investment Bank?

This kind of bank serves as a financial intermediary, and it performs a variety of services for an individual, more typically for a company. Their focus is not on holding money for a client or saving money for a client, it’s on investing and everything that investing entails. The financial transactions for investment banks are typically significant and compounded.  

An example of a job an investment bank does is underwriting.  This involves the act of a certified personal banker to sell and package security on behalf of a client.  Investment banks also facilitate mergers and corporate reorganizations, acting as financial advisors for institutional clients, etc. Their clients are typically pension funds, corporations, hedge funds, etc. Examples of popular investment banks are Barclays, Goldman Sachs, JP Morgan, Morgan Stanley,  etc. Those who work for investment banks have specific careers. These include investment traders, financial advisors as well as salespeople. Investment bankers who work in the United States typically make large salaries starting at $75,000 and above, but the job is not without its long hours and stress.

In the past, an investment bank could not be a commercial bank, as well, in the United States.  More specifically, it could not accept deposits or make loans according to the Glass-Steagall Act.  However, that act was passed in the 1930s but repealed in the 1990s with FDIC insurance remaining in place. Some investment banks, such as Morgan Stanley and Goldman Sachs had to turn into commercial banks during the 2008 economic crisis with permission from the Federal Reserve. After the disaster, investment banks had to undergo changes to become more secure for companies and organizations. Those changes are continuously being worked on.

Therefore, since 2008, the mixing of investment banking with commercial banking has taken a lot of criticism. Many feel the Glass-Steagall Act should never have been repealed.  With that being said, many investment banks have chosen to focus solely on investment banking and not commercial banking to create consumer confidence, especially if another financial disaster, such as that in 2008, were to occur.

Why are Investment Banks Important?

Investment banks are becoming increasingly important because, in the 21st-century, more and more companies are interested in stocks and bonds to raise capital.  An investment banker will have the expertise to bring about the most revenue while staying within the regulatory requirements. An investment banker will know the best way to raise funds by getting creative with financial models while remaining within the law.

Investment banks are particularly suitable for merger and acquisitions. If a company is looking to acquire a competitor, they will almost always gain the advice of an investment banker to go about it in the most logical way. An investment banker such as will know how much a company is worth and will advise its client on what to offer in a way that is most beneficial to the client.

The role of investment banks is crucial for the economy, global economies and economic growth. The more banks of this kind that appear in an economy the better it is for the economy.  For example, the United States has over 100,000 investment bankers. A country such as Nigeria, for example, has only approximately 500. Therefore, there are less professionals of this type knowledgeable enough to solve the economic challenges of the region.  This is one of the reasons why Nigeria is in such economic trouble. A commercial bank’s focus is on sales, lending, transactions, and payments. But an investment bank goes deeper than that. They support equity and capital formation. Nigeria needs less commercial banks and more investment banks.

With so many investment banks in the United States, capital market intermediation and trading are strong and robust. Unlike commercial banks, the state of a countries investment banking helps to create present and future consumption of the country. The United States is the leader in recognizing the importance of investment banking over commercial banking.

The government as well and dominant companies have come to rely on investment bankers to raise funds for their organization or business. In turn, investment banks will match securities for sale with investors. This adds liquidity to the market. Not only do businesses become more efficient, but they also grow fast.

Even though investment banks are separate from commercial banks, they work hand in hand to determine the interest rates. This is extremely crucial, especially in a shifting economy. Interest rates for commercial products and investment products both influence each other.

What also happens with the importance of interest rates is that they predict how profitable it is to borrow funds. When interest rates are high, savings are high. When it is low, savings are low. The information that investment banks determine not alone has to be accurate; it is highly dependent upon.  

What do Investment Banks Mean for the Future?

In today’s times and for future considerations, investment banks have to do more than just complete transactions.  Because so many companies and organizations rely on them, their job is to also educate and inform. The more an investment bank can make the process user-friendly for a company or organization, the more stable their role as an intermediary will be.  A quality investment banker will continually educate himself or herself to make the best investment decisions.

Companies and organizations will always need investment bankers. However, the field will continue to change and evolve, and investment bankers will need to work with existing investment decision models and invent new models and services. Furthermore, no 21st-century investment banker can survive with a cash-only model. Electronic record systems that are bullet-proof for today’s scams and cyber theft are a crucial part of the process.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.