Learn the key functions of corporate banking vs investment banking. How are they related to each other? Discover the Glass-Steagall Act and how it affected business and investment banks.
9 January, Capital.com – Corporate and investment banking have had contradictory relations. Once inseparable, the two banking divisions have since parted from each other.Let’s see how business banks relate to investment banks today.
Corporate Banking vs Investment Banking: Is There a Wall Between Them?
Terms in a nutshell
Corporate banking (CB), also referred to as business banking, is a general term for multiple services provided by a bank or a bank division to companies – from small- and medium-sized enterprises to large multi-national conglomerates. In contrast, individual clients are served by retail banks, providing retail banking services.
As for investment banking (IB), it involves all kinds of services related to the capital creation, such as issuing, buying, selling, and underwriting securities, assisting in merger and acquisition deals (M&A) and more. Investment banks serve companies of any size, governments, as well as well-off individual customers.
Some history
Before the US stock market crash of 1929, commercial banks offered both investment and corporate banking. In the pre-Depression period, they were involved excessively in stock market investments using their clients’ deposits. This improper banking activity is deemed to be the major prerequisite for the events of ‘Black Thursday’.
The Glass-Steagall Act (GSA) of 1933 was a response to these happenings. It separated investment banking from corporate banking. According to the act, investment banks could not receive deposits or give loans, while commercial banks could not deal with investment activities.
In 1999, however, President Bill Clinton repealed the GSA, thus shaping the future of investment banking and corporate banking. From that year on, the two bank divisions once again became affiliated.Despite this, attempts have been made to reintroduce the GSA.
Corporate banking vs investment banking
Corporate banking services
Business banks are a real source of capital for companies of different sizes. Here are major corporate banking offerings that businesses can take advantage of:
Loans: Businesses need financial support to grow or meet increasing operating expenses. For these purposes, banks provide short-term, long-term or asset-based loans, or other credit products.
Equipment financing: business banks offer tailored equipment loans and equipment leasing. Some banks focus on a particular sector, for example, construction, agriculture or manufacturing.
Cash management: also known as treasury management, the service enables clients to manage working capital in a more efficient way. The banks help improve the corporate process of managing cash in and out of a business for the company’s financial solvency.
Investment banking services
Many top-notch investment banks are affiliated with larger banking institutions.The best investment banking firms are affiliated with Bank of America Merrill Lynch, Deutsche Bank JPMorgan Chase, Goldman Sachs, and Morgan Stanley. Here are their primary functions:
M&A transactions: The investment banks’ role in mergers and acquisitions is essential. They evaluate the transaction terms and price, provide meaningful advice and assist the acquiring firm in arranging financing for the deal.
Assistance in capital raising: Investment banks bring businesses to the market through the Initial Public Offering (IPO). Banks will buy the company’s shares and will try to sell them at a higher price. This is known as underwriting. Basically, an investment bank is an intermediary between a company and its investors.
Sales and trading: Investment banks are involved in the buying and selling assets on behalf of their clients. They are rewarded with fees or commission. Through proprietary trading, banks seek to maximise their profits risk by conducting financial transactions using their own capital.
Regardless of the fact that investment and corporate banking are two different banking divisions, commercial banks can implicitly offer investment services. Through their investment banking arms, they can provide their corporate clients with asset management or underwriting services.
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