What is Investment Banking?

Investment banking activity is different than traditional banking. Investment banks often serve as intermediaries that underwrite a new issue of stock and help to distribute it.

They also trade in their own accounts, run hedge funds, and generally invest and speculate in ways that most institutions can’t. Investment banks can assist with new issues of stocks and bonds, purchasing large blocks of them to distribute at a premium.

They engage in swaps in international markets and benefit from arbitrage opportunities, often through high frequency trading (HFT). They manage money and serve as consultants to large numbers of business and other financial institutions.

They take large positions that might be too risky for other institutional investors. They also might assist with mergers and acquisitions, serve as market makers creating liquidity in markets.

The Glass-Steagall Act of 1932-33 separated investment banking from commercial banking, but it was ultimately repealed in 1999. Some blamed the 2007-2008 crash on the repeal, claiming that there was too much speculation interwoven with the banking industry.

As of 2016 it is unknown if Glass-Steagall will be reinstated, but the Volcker Rule, part of the Dodd-Frank Act of 2010, does put a partition between the investment banking side and the commercial banking side.

What is a Bank Reconciliation Statement?
What is an Investment Bank?