Rules and Laws of Investment Banking

 

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. 

Infographics on Investment Bankers


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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