Investment Banking Laws and Regulations
Investment Banking is a popular term in the business arena.
It is also considered to have great scope as a career. So what is it? It is one
of the most essential prerequisites before one begins a business or a startup
or anything else too. It is a necessity. Investment
banking is the division of a financial institution that serves
governments, corporations, and institutions by providing underwriting, capital
raising and advisory services. Investment banks legally act as mediators between
investors who want to invest their funds and the corporations who require
capital to grow their businesses. Investment bankers follow a lawful conduct to maintain their goodwill in the market.
What investment banks actually do?
Investment banks also called corporate finance raise capital
for clients and also provide advisory help on LBOs, M&A and several others.
They help raise capital by underwriting securities to governments and
corporations.
Investment Banks help companies obtain and raise money and
also provide advisory help. They help companies that work around mergers,
acquisitions and also help in trading derivatives, commodities, fixed income
requirements and equity securities.
How banks have grown in
the field of Investment Banking?
Investment Banking had been in its prime from 1896 to 1929
until the great depression began, thanks to the Federal Reserve Loans which had created extreme speculation
of the market. Throughout the former period, J.P. Morgan and National City Bank
were said to always come to the rescue when there was any crisis in the
financial system.
The Great Depression had the banking system in a mess with 40% according to statistics, of banks being forced to merge or just sinking.
Rehabilitation measures were however taken, like the separation between
investment banking services and brokerage services to prevent any conflict of
interests if they did try to do both and the Bank Act of 1933 (Glass-Steagall
Act) was established which mainly got the distinction between commercial banking and
investment banking.
A regulation like Chinese wall was also made during this period. The 1970-1980 decade saw integrated investment banks flourish which had sales, trading, investment banking and research at one stop. Corporate mergers became the trend in the late 1970s.
The 80’s produced popular products like
high yield, structured products and derivatives which gave lucrative to the
ones who provided them, the investment banks.
Through the 1990s, we saw the IPO dominate the world of investment banking and by early 2000s at least 548 IPO deals had been made and done, says statistics. Gramm-Leach-Bliley Act (GLBA) of November 1999 allowed security banking (insurance) along with investment banking, thus permitting broad banking.
GLBA was the turning point since a long time had been since the
belief against the mixing of financial activities and other banking.
Investment banking became a more appealing career known for
its flair and power in the 1980s with mega-deals everywhere. It also became a
topic in popular media (eg. Oliver Stone in Wall Street and Tom Wolfe in
Bonfire of the Vanities).
What are the types of Investment Banking?
There are many types
of Investment banking but it is majorly divisible into 3 groups:
·
Capital Markets
Capital markets are financial market in which long-term debt basically over a year or equity-backed securities are bought and sold.
It channels the wealth of savers to those who can put it to
long-term productive use, such as companies or governments making long-term investments.
·
Coverage Groups
The coverage group focuses on a
sector or a group of allied sectors and develops and expertise in them. It is
the coverage group's responsibility to know, understand and be the authority on
that sector in a bank.
·
Industry Groups
Industrial group may refer to organizations
of companies in different industries with common ownership interests, which include
firms necessary to manufacture and sell products, a network of manufacturers, marketing
organizations distributors, suppliers, retailers, and creditors.
What are the Activities of Investment Banks?
There is the Investment Banking Division (IBD) of a bank and a full time service Investment Bank. The former provides only M&A advisory services and underwriting.
Now
we know that the IBD of Banks provide only M&A and Underwriting. They
advise both the buyers and sellers of these transactions.
·
In the Sales and trading sector
The larger banks provide a little
more help to their clients where they will buy and sell items or securities on
their behalf and also of the bank’s.
·
In the Research sector
The ratings of buying and selling of
items and securities are reviewed, companies are reviewed and reports are
written on the data and analysis. They make reports that will help investors
make decisions and also trade stocks.
·
M&A are Mergers and Acquisitions
The banks find opportunities and negotiate for their clients on their behalf by employing their extensive networks.
Investment Banks provide advisory aid to both the buyers and sellers
from the start of the business to the end.
·
Asset Management
This service is also provided by
Investment banks where they manage investments for a great number of investors
which even include individuals and investments of various kinds.
·
Underwriting services
This service also goes hand in hand
with capital raising and this
works between investors and companies which raise money, or even go public
through the IPO process. This gets the primary market or new capital.
In the Underwriting services, we have three types:
1.
The
underwriter agrees to see as much issue at the offered price fixed together on
agreement but can also return unsold shares to the one who issued, albeit any
financial responsibility.
2.
Firm
Commitment- The underwriter has to buy the entire issue and also should be
responsible for all sold and unsold shares.
3.
All-Or-None-
The underwriter can decline the deal if the entire issue is not sold at the
offered price. This is like a binary concept. Either the company receives
everything or it receives nothing.
Who can be the participants of Investment banking?
The Clients
·
Corporations: These include public and private companies. Investment banks help these go
public (meaning, IPO), in their business growth, additional capital raising,
acquisition making (M&A), research, selling of business units and also
advisory help on general corporate
finance.
·
Governments-
Money raising, security trading and buying/selling of crown corporations.
·
Institutions: These manage others money and investment banks provide these institutions with
security trading and research.
The Bankers
If you are an Investment
banker yourself, just recall these lines from Tom Wolfe’s book:
Look the Part
Greed might photograph well, but that doesn’t make it good.
Every battle is won before it is ever fought.
Investment Banking demands specific skills from their bankers for them to qualify to provide advisory help, underwriting services, analysis, research and M&A which are as follows:
- Business
valuation
- Sales
and business development
- Pitch
books and presentations
- Transaction
documents
- Financial
modeling
- Negotiation
- Relationships
management
Quite the tricky business with ups and downs forthcoming and
sometimes even unpredictably investment banking is quite the necessity in
everyday life and in business.You can reap your fruits if it is handled carefully
and strategically.
If you are looking to make investments, make sure to do your research first and consult the most suitable and best Investment Bank or banker to get your work on the best track.
Though investment skills are gained over time with experience but
gaining knowledge consistently is involved in the process that leads one to
expertise.
After going through this article we will be able to:
- Determine
Investment Banking Analyst Salary
- Make
the best use of Investment Calculator
- Maintain
Investment Banking Book
- Determine
Investment Banking Associate salary
- Be
an Investment Banker
- Understanding
Investment Property and make its best use
- Understand
the work of Investment Analyst and perform Investment Analysis
- Locate
Investment Opportunities
- Make
good decisions on Investing Money
- Locate
Best Investments
- Find
Best Mutual Funds
- Understand better how and where to invest money
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