Investment Banking vs Commercial Banking

What is Investment Banking vs Commercial Banking?

Investment banking vs commercial banking is a comparison of which markets and clientele each banking sector serves.

What is Investment Banking?

Investment banking is devoted to assisting companies, institutions, and other large entities (such as governments) manage their money. It is designed to offer clientele a host of different options in order to help them succeed financially.

Investment banks assist their major clients by underwriting equity and debt securities, helping create capital, and issuing stocks. Investment banks are also typically always involved during mergers and acquisitions.

Investment banking is structured to help large entities. One of the most important functions investment banks perform is issuing stock for companies, namely a company’s initial public offer (IPO). When a company makes its stock available to the public for the first time, money flow can start to get confusing. Investment banks step in to help handle the matter.

Investment banks also act as advisors, helping companies and other organizations determine if trade with other companies is advisable. As advisors, investment banks also help their clients decide if merging with or acquiring a company is a wise move.

What is Commercial Banking?

Commercial banking is devoted to serving smaller, middle-market businesses with their financial needs. They support corporate clients with their day-to-day treasury functions – like basic cash management services, foreign exchange support, and payment processing capabilities. They also offer lending solutions for their commercial borrowers – credit facilities include overdrafts, revolving lines of credit, term loans, commercial mortgages, and acquisition-related financing.

Commercial banks generally operate under a federal government charter. In some cases, it’s not the federal government that issues the charter but rather the state or province that the bank operates in. Banks operating under a charter need to become members of the Federal Reserve System, which places more stringent capital requirements.

One of the most important requirements is the carrying of deposit insurance. It is a regulation that offers protection to consumers should the bank fail. In some jurisdictions, the insurance covers deposits up to $250,000.

Commercial banks generate income from interest rates on loans and the service fees they charge. To learn how risk is priced in the commercial mid-market, consider CFI’s course on Loan Pricing.

Loan Pricing is part of CFI’s Commercial Banking & Credit Analyst (CBCA)™ certification, which includes 35 courses. To learn more, download our CBCA™ brochure below.

Differences: Investment Banking vs Commercial Banking

1. Clientele

Clearly, the primary difference between investment banking and commercial banking is the clientele. Investment banks serve large, publicly traded corporations, while commercial banks cater to smaller, middle-market clients.

2. Services

Also, there are major differences in services. Investment banks handle large amounts of money and advise their clients about sound investments. Commercial banks handle day-to-day financial transactions and smaller credit requests for mostly non-public borrowers.

3. Performance Measure

Another key difference is that investment banks and their performance are tied to the stock market’s performance. On the other hand, commercial banks are affected by credit demand and economic growth.

Related Readings

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Careers in Commercial Banking
• How to Get a Job in Investment Banking
• List of Top Investment Banks
• Top Banks in the USA
• See all career resources