Investment banking facts for kids

Investment banking is a special kind of financial service that helps big companies, governments, and large investors with their money. It's different from the bank where your family might keep their savings because investment banks don't take deposits. Instead, they help companies do important things like raise money by selling parts of their company (called shares) or borrowing money (called bonds). They also help companies when they want to join with another company or buy one. Investment banks also offer advice and services related to trading different financial products.

A Look at History

How Investment Banking Started

The idea of investment banking has a long history. One of the earliest examples was the Dutch East India Company. This company was the first to sell bonds and shares of stock to the general public a long time ago. It was also the first company to have its shares traded publicly.

Changes Over Time

Investment banking has changed a lot over the years. It started with firms mainly helping companies sell new shares and bonds, and advising on company mergers. Over time, these banks grew to offer many more services, like researching companies and managing investments.

In the United States, there was a rule called the Glass–Steagall Act from 1933 to 1999. This rule kept investment banks separate from regular banks that take deposits. After it was removed in 1999, many banks started offering both types of services. However, after the 2008 financial crisis, new rules were put in place. For example, the Volcker Rule (part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010) limited some of the risky trading activities that banks could do.

Today, big investment banks often have three main parts:

• Helping companies with mergers and acquisitions, and selling shares or bonds.
• Managing money for other investors.
• Buying and selling financial products for the bank and its clients.

How Investment Banks Are Organized

Investment banks have different teams that work together. These are often called the "front office," "middle office," and "back office."

Front Office: Working with Clients

The front office teams work directly with clients and help the bank make money. There are two main areas here:

• Investment Banking: This team advises organizations on big decisions. They help companies when they want to merge with another company or buy one. They also help companies get money by selling shares or bonds to investors.
• Markets: This team helps clients buy and sell different financial products. They have experts who suggest trading ideas and manage orders. They also have strategists who advise clients on how to act in various markets.

Researching Companies

The research team in an investment bank studies companies and writes reports about their future. These reports often suggest if a company's stock is a "buy," "hold," or "sell." This research helps traders, sales teams, and clients make smart investment choices.

Sometimes, there can be a concern about different parts of the bank having different goals. For example, the research team might want to give an honest opinion, but the investment banking team might want a good relationship with a company they are helping. To prevent problems, banks use a "Chinese wall." This is a way to keep information separate between different departments so that one team's actions don't unfairly influence another's.

Middle Office: Keeping the Bank Safe

The middle office teams make sure the bank is safe and follows the rules.

• Risk Management: This team looks at all the possible risks the bank might face. For example, they check if a company might not be able to pay back its loan, or if market prices could change unexpectedly. They help the bank avoid taking too many risks.
• Internal Control: This team tracks the bank's money flow and advises senior leaders on how to manage the bank's overall risk and how profitable its different businesses are.

Risk in banking

Back Office: Handling the Details

The back office teams handle all the paperwork and technical details after a deal is made. They make sure all transactions are recorded correctly and that the bank's computer systems run smoothly. Many banks use advanced software created by their technology teams to manage these processes.

Other Services Investment Banks Offer

• Investment Management: This involves professionally managing different investments like stocks and bonds for clients. These clients can be large organizations or individual investors.
• Merchant Banking: This is when a bank invests its own money into companies in exchange for a share of ownership, rather than just giving loans. They also offer advice on how to manage and grow these companies.

The Investment Banking World

The investment banking industry can be divided into different groups based on their size and the types of clients they serve:

• Bulge Bracket: These are the largest and most well-known investment banks.
• Middle Market: These banks work with mid-sized businesses.
• Boutique Market: These are smaller, specialized banks that focus on specific types of services or clients.

Top Investment Banks

Many of the world's largest investment banks are headquartered in financial centers like New York City, City of London, Frankfurt, Hong Kong, Singapore, and Tokyo. These cities are hubs for major financial activities.

Many of the largest investment banks, including JPMorgan Chase, belong to the Bulge Bracket.

Here are some of the top investment banks based on their advisory fees in 2020:

Rank	Company	Ticker	Fees ($bn)
1.	Goldman Sachs	GS	287.1
2.	Morgan Stanley	MS	252.2
3.	JPMorgan Chase	JPM	208.1
4.	Bank of America Merrill Lynch	BAC	169.9
5.	Rothschild & Co	ROTH	94.6
6.	Citi	C	91.8
7.	Evercore	EVR	90.3
8.	Barclays	BCS	71.7
9.	UBS	UBS	65.9

The 2008 Financial Crisis

Around 2008, the world faced a big financial challenge. During this time, some well-known investment banks ran into serious trouble. For example, a very large bank called Lehman Brothers went out of business. Others like Merrill Lynch and Bear Stearns had to be quickly bought by bigger banks to save them. To help stabilize the economy, governments stepped in to provide support to many financial companies, including investment banks. This period led to many new rules and changes in how investment banks operate, aiming to make the financial system safer and prevent similar problems in the future.

Criticisms and How Banks Manage Them

The investment banking industry sometimes faces criticism. One common concern is about "conflicts of interest." This happens when different parts of the same bank might have different goals, which could potentially lead to problems. For example, a team advising a company might have different interests than a team trading stocks.

To prevent these issues, banks try to create a "Chinese wall." This is a way to keep information separate between different departments. The goal is to ensure that one team's actions don't unfairly influence another's. Regulators like the Financial Conduct Authority (FCA) in the United Kingdom and the U.S. Securities and Exchange Commission (SEC) in the United States have rules to make sure banks act fairly and transparently.

See also

In Spanish: Banca de inversión para niños

• Alternative investment
• Boutique investment bank
• Devolvement
• Independent advisory firm
• Investment Banking Exam
• List of investment banks
• Traditional investments