Investment banks - what is it? Types and functions of investment banks

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Quite often today you can find such a thing as "investment banks". What is this? What is their purpose and purpose? Why are they created? What rules are followed? These and a number of other questions will be answered within the article.

General information

So, first let's find out what investment banks are. These are special financial institutions that help raise capital for governments and large companies in global markets. They also provide consulting services during the sale and purchase of a business. An investment commercial bank can also help with bond and stock trading by providing brokerage services. And finally, he helps to deal with financial instruments, commodities, currencies and prepares analytical reports on the markets where he operates.

If we talk about specific definitions, there is no consensus, and many countries give their own interpretation of the meaning. We will take the following as a reference point: investment banks are enterprises that trade in corporate and government securities, primarily throughhandling large packages; they also engage in corporate financing in the form of raising capital through issued shares and bonds, or through the issuance of a long-term investment loan.

Key Features

Commercial investment banks have their own unique features. But you can highlight their main characteristics:

1. Thus, an investment bank is a universal large commercial organization that combines and provides a large number of permitted activities in the securities markets and some other financial platforms.
2. The main activity is to raise funds through securities.
3. As a large institution, the investment bank almost always operates on a wholesale basis.
4. Priority is given to medium- and long-term investments.
5. Securities serve as the basis for the portfolio of assets, and it is the non-commercial part of the market that is of the greatest interest.

Example of activity

Let's take BCS as the subject under consideration. The investment bank is engaged in attraction of financing. But investing in something is not his only activity. It is a fairly universal institution in which other types of activities carried out by credit institutions are also developed. What does BCS have for this? An investment bank, first of all, is characterized by well-developed and organized work in various areas. This creates the basis for investing. Investments are both the most prestigious and the most profitable instruments of work. Therefore, as a rule, all more or less large companies work with them.

Functions

So, we know that investment banks in Russia, as well as in other countries, are special credit institutions that profile on investments in various companies and enterprises. And they have the following functions:

1. Performing passive operations. These include those that help in the formation of the bank's own resources.
2. Engaged in active operations. This is understood as certain actions through which credit institutions allocate resources. These include bank investments, loans secured by securities, and so on. All these transactions are called stock transactions.

Investment banks generate resources through their own and borrowed funds. The greatest attention is paid to the issue and placement of securities.

What's abroad?

In many countries, investment banks/funds have been around for a long time, so you can turn to them in order to better understand the features of the existing mechanisms. Thus, in the developed capitalist countries it is popular to provide direct long-term industrial credit to large enterprises secured by their plants, factories and equipment. This approach is often accompanied by the fact that banks become participants in economic activity. In other words, there is a process of splicingindustrial and banking capital. How can this happen? One option is bank investment. In such cases, securities are bought. Then they become the property of the bank itself.

In general, there are a lot of options for interaction. But the direct participation of the credit institution itself in different countries may have its own specifics. When an international investment bank stops offering securities, it subsequently begins to form a secondary market for them. To do this, he acts as a dealer and broker. In addition, it is not uncommon for credit institutions to act as guarantors or founders of new organizations that conduct initial public offerings. They can also create consortiums that will include investment and commercial banks, as well as dealer firms for greater efficiency.

How about in the Russian Federation?

We got a pretty good look at how an overseas international investment bank operates. Now let's pay attention to the state of affairs in the Russian Federation. So, in the country they do the following:

1. Perform the functions of dealers, brokers and depositaries.
2. They form emission portfolios, as well as individual sets of securities for specific investors.
3. Organize settlements according to transactions with securities.
4. Provides investment advisory services.
5. Searching for people who are willing to invest theirmoney to various entities, as well as places where you can get the highest profit.

Let's take First Investment Bank as an example. This is a fairly powerful financial institution that specializes in a wide range of investments. So, in addition to the usual investments in securities, it also provides the opportunity to buy collectible coins, precious metals, operate with assets remotely through a secure cryptosystem and digital signature. But the First Investment Bank is focused primarily on legal entities. And using the services of such institutions can be quite problematic in practice for ordinary citizens.

Is everything so bad?

Not at all. Many lending institutions are universal. As an example, consider Investment Trade Bank, also known as Investtorgbank. This credit institution is engaged in the mobilization of long-term loan capital and its provision to borrowers through the issuance and placement of loan obligations. "Investment Trade Bank" is a structure that is primarily aimed at enterprises and organizations of various forms. But besides this, there are a number of services for the average layman. True, you can quickly get something like a standard set of services like loans and deposits. Although investments are available, they still require the signing of a certain number of additional pieces of paper. Therefore, when going to such institutions, you need to tune in that you will have to get acquainted with the content of a fairly large numberdocuments.

In general, investment banks are structures that can be classified into one of two types:

1. Operate in the field of placement and trading of securities.
2. Perform long-term lending.

First type investment banks

The first such institutions were formed as limited liability partnerships in the first quarter of the nineteenth century. In the twentieth century, there has been a trend of retreat from the affairs of private bankers, small and medium-sized organizations in favor of large formations. The legally formalized division into investment and commercial was first carried out in the United States in 1933 by the Glass-Steagall act. The economic actors of interest to us have concentrated on raising funds for large companies and enterprises. Over time, they began to actively participate in the creation of new economic entities, as well as their reorganizations, mergers and other changes in the organizational structure.

What else are they doing?

Initially, it should be noted that these institutions do not accept deposits. They concentrated on the issuance of securities and guarantors. Their income is formed at the expense of commissions or payments of predetermined amounts that do not depend on performance. Banks also act as agents who acquire some of the securities in cases where they believe that the company will operate successfully and they will be able to make money on it. Whenplacement occurs, the conditions, terms, size and responsibilities are negotiated. For more efficient operation, they are organized into banking syndicates.

Now it often happens that companies develop relatively slowly without acting in this way, so investment financial institutions do not sit idle. Such a combination is also common, when the heads of banks are at the same time members of the board of directors of enterprises and corporate structures for which they issue shares. It should be noted that in the field of investment banking, it is believed that the main influence here belongs to half a dozen structures, and all the rest are just intermediary organizations. This, perhaps, is all.

Investment banks of the second type

They are usually created on a shareholder basis. It often happens that they are organized together with the state. Their main goal is to provide medium and long-term lending for certain sectors of the economy or special targeted programs. In addition, they can also operate in the loan capital markets, mobilizing funds from the population and small businesses. They also carry out lending activities and investments in state and local securities. It is impossible not to appreciate their contribution to the development of various financial services. Such banking houses arose during the transition to capitalism and were formed initially from usurers who united in partnership. Initially, they took over the execution of trading,settlement, acceptance and emission functions. They also worked with securities, but, as a rule, state ones. As of the twenty-first century, about fifty powerful banking houses have formed. Their peculiarity is that they, as a rule, were formed from family enterprises and only over time were transformed into joint-stock organizations. But to this day, there is a priority of representatives of a particular genus.

What are they doing?

If we talk about passive operations, then this is their own capital, which was formed from family shares, share capital and reserve capital, retained earnings, borrowed funds and other things. This is the own resource of credit institutions.

But the most interesting in the study are active operations. Investment banks have built their true power on them. Activity in this case involves working with cash. Private and government securities, real estate and financial instruments.

Features

It should be noted that investment banks are usually the prerogative of developed countries. Only a relatively small group of developing countries can boast of having them. After all, they are engaged in real investments, that is, investments in fixed capital, which contributes to the growth of inventories. And for greater efficiency, technological development is required as a result of the scientific and technological revolution and skilled labor.

Conclusion

For investment banks, when they decide on investments, the following are important:

• Intellectual potential of production.
• Qualification.
• Experience and knowledge of employees.
• Training costs.
• Anything else that will allow you to use the acquired capital as efficiently as possible.