Role of Investment Banks

Investment

banks
help
companies and governments
and their agencies to raise
money by issuing and selling
securities
in
the
primary
market. They 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.

Investment

banks 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.

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.

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).

However,

only a few small

firms provide only this service.
Almost all investment banks
are
heavily
involved
in
providing additional financial
services for clients, such as the
trading of derivatives, fixed
income,
foreign
exchange,
commodity,
and
equity
securities.

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.).

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.
Many firms have both buy and
sell side components.

Organizational
Structure of an
Investment Bank

Primary Function

The

primary function of an
investment bank is 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.

1. Front Office

Investment Banking
Investment
Management
Sales and Trading
Research

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
(often pronounced).

Investment
Management

The

professional management
of various securities (shares,
bonds etc) and other assets
(e.g. real estate), to meet
specified investment goals for
the benefit of the investors.
Investors may be institutions
(insurance companies, pension
funds, corporations etc.) or

private

investors (both directly

via investment contracts and
more commonly via collective
investment schemes, mutual
funds) .

Sales and
Trading

is

often the most profitable

area of an investment bank.
responsible for the majority of
revenue of most investment
banks

Sales and Trading

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-networth 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,

Research

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.

Structuring

2. Middle Office
Risk Management

Risk

Management
involves
analyzing the market and credit
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.

Another

key Middle Office role

is to ensure that the above
mentioned economic risks are
captured accurately (as per
agreement
of
commercial
terms with the counterparty)
correctly (as per standardized
booking models in the most
appropriate systems) and on
time
(typically
within
30
minutes of trade execution).

In

recent years the risk of

errors has become known as
"operational risk" and the
assurance
Middle
Offices
provide now include measures
to address this risk. When this
assurance is not in place,
market and credit risk analysis
can be unreliable and open to
deliberate manipulation.

3. Back Office
Operations
Technology

Operations

involves datachecking trades that have been

conducted, ensuring that they
are
not
erroneous,
and
transacting
the
required
transfers. While it provides the
greatest job security of the
divisions
Back
Officewithin an investment
bank,

it

is a critical part of the bank

that
involves
managing
the
financial information of the bank
and ensures efficient capital
markets through the financial
reporting function. The staff in
these areas are often highly
qualified and need to understand
in
depth
the
deals
and
transactions that occur across all
the divisions of the bank.

Technology

Every

major investment bank

has considerable amounts of inhouse software, created by the
Technology team, who are also
responsible for Computer and
Telecommunications-based
support. Technology has changed
considerably in the last few years
as more sales and trading desks
are using electronic trading
platforms.

These

platforms can serve as

auto-executed
hedging
to
complex
model
driven
algorithms.

National Role
of Investment
Banks

Investment

banks are social

institutions.
They
are
custodians and trustees of the
publics money and promoting
national
interests
strengthening the sovereignty
of our state technological upgradation and reduction of
asset distributional inequities
must be explicit objectives of
their business strategy.

These

objectives will not be

unintentionally,
automatically
achieved by profit maximization.
A strategy has to be crafted
which deliberately synthesizes
financial viability and profitability
concerns with the concern for
safeguarding
national
sovereignty
and
promoting
national development.