Friday, March 29, 2013

Is a pure-play investment bank really a bank?

Many people wonder why the word "bank" in "investment-bank". I mean, do those Goldmans and Morgans have anything in common with the main street banks, such as the savings banks or commercial banks? Well, I see  some non-trivial similarities.

Similarity - service provider and facilitator. Like a commercial bank, an investment bank is supposed to facilitate clients' financial strategies. This is obvious in the IB business model (below). It's less clear in the SS model (below). In an ideal world, an investment bank in its SS role should not do the buy-side type of business (prop-trading) and compete with clients. This ideal world doesn't exist, but most investment banks do look like sell-side service providers.

Similarity - lending. Like all banks, an investment bank lends money all the time, and it also borrows money from investors ("depositors") and central banks.

The IB business model described below has so much in common with commercial banking that most of the major investment banks today are part of commercial banks. This model is known as universal banking, adopted by Citi, Barclays, JMPC, UBS/CS, HSBC/SCB/RBS, DB, BNP/SG, RBC etc. If we focus on the investment banking business on its own, there are basically 2 main business models --

IB -- The traditional meaning of IB is related to "funding" and "financing" for a big client's big project, such as a merger or privatization but more commonly bond/equity issue, including public issues a.k.a. IPOs. These are often dressed up, packaged as "advisory business", but what clients need most is financing, as illustrated in the Napoleonic wars. In such a funding project, the IB does something similar to a regular bank - collect funds from a large number of investors and lend to that particular client. However, the risks, expertise, techniques, operations, competitive strategies ... tend to be different from regular commercial banking.

SS -- The other major IB business model is playing the sell-side on security markets. This is not just passive order-taking. Many players are also in the business to create structured products. They have an advisory team to actively engage prospective clients and customize their products for each client. See other posts in this blog.

All other IB business models are lesser known but could sometimes generate more profit than the 2 main models
- asset management -- buy-side business model
- prime brokerage
- security lending
- clearance
- investment research

No comments:

Total Pageviews

my favorite topics (labels)

_fuxi (302) _misLabel (13) _orig? (3) _rm (2) _vague (2) clarified (58) cpp (39) cpp_const (22) cpp_real (76) cpp/java/c# (101) cppBig4 (54) cppSmartPtr (35) cppSTL (33) cppSTL_itr (27) cppSTL_real (26) cppTemplate (28) creditMkt (14) db (65) db_sybase (43) deepUnder (31) dotnet (20) ECN (27) econ/bank` (36) fin/sys_misc (43) finGreek (34) finReal (45) finRisk (30) finTechDesign (46) finTechMisc (32) finVol (66) FixedIncom (28) fMath (7) fMathOption (33) fMathStoch (67) forex (39) gr8IV_Q (46) GTD_skill (15) GUI_event (30) inMemDB (42) intuit_math (41) intuitFinance (57) javaMisc (68) javaServerSide (13) lambda/delegate (22) marketData (28) math (10) mathStat (55) memIssue (8) memMgmt (66) metaProgram` (6) OO_Design (84) original_content (749) polymorphic/vptr (40) productive (21) ptr/ref (48) py (28) reflect (8) script`/unix (82) socket/stream (39) subquery/join (30) subvert (13) swing/wpf (9) sysProgram` (16) thread (164) thread_CAS (15) thread_cpp (28) Thread* (22) timeSaver (80) transactional (23) tune (24) tuneDB (40) tuneLatency (30) z_ajax (9) z_algoDataStruct (41) z_arch (26) z_arch_job (27) z_automateTest (17) z_autoTrad` (19) z_bestPractice (39) z_bold (83) z_bondMath (35) z_book (18) z_boost (19) z_byRef^Val (32) z_c#GUI (43) z_c#misc (80) z_cast/convert (28) z_container (67) z_cStr/arr (39) z_Favorite* (8) z_FIX (15) z_forex (48) z_fwd_Deal (18) z_gz=job (33) z_gzBig20 (13) z_gzMgr (13) z_gzPain (20) z_gzThreat (19) z_hib (19) z_IDE (52) z_ikm (5) z_IR_misc (36) z_IRS (26) z_javaWeb (28) z_jdbc (10) z_jobFinTech (46) z_jobHunt (20) z_jobRealXp (10) z_jobStrength (15) z_jobUS^asia (27) z_letter (42) z_linq (10) z_memberHid` (11) z_MOM (54) z_nestedClass (5) z_oq (24) z_PCP (12) z_pearl (1) z_php (20) z_prodSupport (7) z_py (31) z_quant (14) z_regex (8) z_rv (38) z_skillist (48) z_slic`Problem (6) z_SOA (14) z_spring (25) z_src_code (8) z_swingMisc (50) z_swingTable (26) z_unpublish (2) z_VBA/Excel (8) z_windoz (17) z_wpfCommand (9)

About Me

New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin