What is Investment Banking vs Commercial Banking?
Investment banking vs commercial banking is a comparison of which markets and clientele each banking sector serves.
- Investment banking is to help large, publicly traded entities make sound investments, issue company stock, and assist with mergers and acquisitions.
- Commercial banking supports small and middle-market business clients, usually privately owned, with day-to-day banking and credit needs, including working capital and growth-related CAPEX financing.
- Investment banking and commercial banking are different – in a nutshell – because of scale. Investment banks typically deal with much larger transactions, and they satisfy capital requirements with public issuances. Commercial banks, on the other hand, support smaller financing needs for mostly non-public, corporate borrowers.
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.
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Differences: Investment Banking vs Commercial Banking
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.
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.
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: