How Investment Banking Is The Business Of Raising Capital, Increasing Profit, And Advising Essay

The Merriam Webster dictionary defines the noun “bank” as “an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds.” In essence it is an institution that serves as a medium of flow of funds between users and savers. A bank is a financial institution that links the flow of funds from savers to users and back. For the purpose of this audit report we will broadly classify banks into two major categories: commercial banks and investment banks.

There are various categories of banking; these include retail banking, directly dealing with small businesses and persons. Commercial and Corporate banking which offers services to medium and large businesses (Koch & MacDonald 2010). Private banking, deals with individuals, offering them one on one service. The last category is investment banking. These help clients to raise capital and often invest in financial markets. Most global banking institutions provide all these services combined. With all these institutions in existence within the same localities and offering similar services, there is a need to regulate the industry so as to protect the consumer and provide fair working environment for all banks (Du & Girma, 2011).

The Glass-Steagall Act of 1933 that defined the roles for commercial banks, investments banks and insurance firms was over ridden by the Gramm-Leach-Bliley Act (1999) which repealed the provisions that restricted affiliations in financial institutions. Hence one solution is to overcome the incentive problem and the conflict of interests that arise when financial institutions simultaneously undertake financial activities of varied nature.

Investment Banking is now at a crucial junction, where Investment and Commercial Banking are splitting up due to the ring fence which is being built around these two banking areas. As well, the new upcoming regulation, Basel III, will have a huge impact in the investment banks, with higher liquidity and capital requirements, in order to increase solvency and stability in financial industries.

They compared default rates of 1926-1930, when bank affiliates and investment banks were both actively underwriting numerous security issuances. The main focus of the investigation was set at issues from commercial banks’ affiliates (bank affiliates), investment banks (without the deposit business) and especially at issues from J.P Morgan, Kuhn, Loeb & Co., The First National Bank and The Chase Bank. The two latter banks were accused of actively misleading the public into investing in poor quality security issues and also committing various abuses against their shareholders and the government. Precisely, in relation to their underwriting activities, the security affiliates of these two banks were blamed of misrepresenting the actual quality of new issued securities, as well as of abusing their commercial and investment banking business for the packaging of bad loans into securities and transferring them to uninformed public investors. These two banks are analyzed separately because evidence was leveled against these two in the Pecora hearings (Ang and Richardson, 1993, P. 353). Furthermore, Ang and Richardson (1993) especially mention J.P Morgan and Kuhn, Loeb & Co., since they cannot be clearly classified as commercial banks or pure investment banks, since they do accept deposits but have a broad history of underwriting. The

Investment Banker: An intermediary who arranges the sale of stock and bonds to raise capital for corporations. Also involved in arranging mergers and acquisitions of companies.

The United States of America’s financial system comprises of the banking system, financial markets and nonbank financial institutions. (Lee, 2001) Banking system furthermore consists of the Federal Reserve System, foreign banks, commercial banks, offshore banks, credit unions and saving institutions. Financial markets consist of debt and money markets, equities markets and futures and options markets. Lastly, nonbank financial institutions consist of asset-based finance companies, commercial lending companies and insurance companies. This paper is an endeavor to understand the workings and structure of the Federal Reserve Banks of USA.

The investment banks, and subsequent stock brokerage firms, was regulated by the Security and Exchange Commission. The banking entities, in this portion of the financial sector, were used to dealing in high risk business that were structured on the business’ equity and debt capital, instead of the commercial banks’ deposits of customers. The activities in this sector of the financial system were underwriting stocks and bonds, insurance markets, the investments in subprime debt markets and mortgages.

Ch.1 financial intermediation results from economies of scale and the specialization of financial transactions. (banks, inv. companies [mutual & pension funds], insurance companies, credit unions, brokerage firms, investment banks). Inv. banks assist firms in raising capital, create the market for innovative new securities that meet the risk and return demand (CMOs, collateralized mortgage obligations – derivative security that separates the cash flows of a mortgage pool into different classes with different maturities and risks). risk and return are the most important characteristics of financial assets. Another is tax. (high tax-bracket investors would, other things equal, would prefer tax-exempt securities [municipal bonds]).

Investment banking dates all the way back to early America, during the Civil War to be exact. During the Civil War, Jay Cooke, a Philadelphia financier, established the first modern investment bank. Although this was the first “official” investment bank, there had been many private banks doing the same jobs. After the civil war these financial services evolved dramatically. Investment bankers started to influence client companies by sitting on finance committees or even on the board of directors for the companies themselves.

Financial Management is a critical aspect of any business in order to achieve a sustainable and efficient cash flow. It is essential in maintaining the link between a business’s future financial goals (profit maximization) and the resources that it has in order to achieve its objectives. Businesses demand certain common goals that increase a bussiness's all around achievement, Some of which involve; growth amongst assests, An increase in efficiency in all areas of the business whether it be management or not. And the ability to meet short term and long term debts. Finacial management undertakes the responsibility to implement and acheive these goals for the business using a range of strategies shaped to meet the needs of the business and

Banks, specifically, lessen expenses of securing and preparing data about firms and their supervisors and in this manner diminish office costs as they have created ability to recognize great and awful borrowers. Moreover, bank loaning is prone to be critical when financial specialists face ex post good risk issues, with firms of higher recognizable qualities getting from the capital business. Conversely, market-based economies encounter essentially and solidly stronger bounce back than the bank-based ones. In the US, the UK and Japan, the stock exchange assumed an imperative part in financing financial development, while the managing a banking sector assumed a more vital part in Germany, France, Japan and Korea. Besides, the managing a banking sector and stocks in every nation were corresponding to one another during the time spent monetary development aside from the US, where the two segments were gently

A discussion of the functions of bank capital and the role of the risk-return trade-off

Raising Capital and Security Underwriting: One function of an Investment Bank is to package and issue securities for sale to clients, companies or the general public. An investment bank would for example facilitate the sale of shares of a previously private company that would like to go public and offer those shares for sale to investors on an open market. The investment bank would determine the value of the security and the underlying risk of the asset in order to sell it at an

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