Investment banking, also called I-banking, refers to the financial services provided by investment bankers. Until 1933, commercial banks participated in activities that are now purely investment-banking activities, such as UNDERWRITING. The 1929 STOCK MARKET crash and the resulting GREAT DEPRESSION led U.S. lawmakers to pass several laws between 1933 and 1940 that aimed to regulate the securities industry, since bankers and financial institutions were perceived as having created the crash and depression. Laws aimed at regulating the securities industry included the Glass-Stegall Act of 1933, the Securities Act of 1933, and the Securities Exchange Act of 1934. The term INVESTMENT BANKER was created in 1933 when the Glass-Stegall Act prohibited commercial bankers (i.e., those whose functions included making LOANS and accepting deposits) from participating in risk-taking activities such as underwriting and dealing in corporate securities and certain governmental securities. The act also aimed to encourage the stability of commercial banks in that entities that pursued underwriting and dealing in securities were considered investment bankers and could not offer services such as providing loans or accepting deposits. Conversely, entities that provided loans and accepted deposits were commercial bankers and could not underwrite or deal in securities. Thus, after 1933 the financial-services industry was divided into investment banking and commercial banking. Investment bankers are not investors or bankers. Rather, they are firms that provide a wide range of financial services, including underwriting and distributing new securities issues to help CORPORATIONs and governments raise CAPITAL or obtain financing, MERGERS AND ACQUISITIONS services, and wholesale and retail broker services. Corporations and government entities sometimes issue securities such as stocks, BONDS, and OPTIONS in order to raise capital or funds for their operations. Investment bankers act as FINANCIAL INTERMEDIARIES between the investing public and corporate and government securities issuers. Generally investment bankers buy new securities issued by a corporation or a government entity and resell those securities to the public. Firm-commitment underwriting refers to the practice of investment bankers purchasing new issues of securities (purchase price) and reselling those securities at a higher price than the purchase price. The investment bankers’ PROFIT is the spread (or the difference) between the purchase price and the selling price of the securities. Investment bankers may also sell new securities issues on a “best effort” basis, which refers to the practice of their marketing and selling new securities issues on a commission basis rather than underwriting. Investment bankers may assist businesses with mergers, acquisitions, and divestitures—for instance, identifying possible merger opportunities, negotiating the purchase of another business, and structuring the purchase. Investment bankers may also offer wholesale and retail broker services to assist institutional investors, such as entities that manage large groups of funds like pension funds or MUTUAL FUNDS, in buying or selling securities for their portfolios; retail brokerage services for individuals who are interested in creating and managing their individual investment portfolios; and private, brokerage and moneymanagement services for very wealthy individuals. There are three major categories of investment bankers based on the types of service they offer and where they offer those services: full service, regional, and boutiques. Full-service investment bankers are large organizations that operate on a global basis and offer a full range of investment banking services. Some full-service investment bankers are known as “super-bulge” bracket firms because they have major market share in the industry and relationships with most of the leading corporations. Goldman Sachs and Merrill Lynch are examples of super-bulge bracket firms. Regional investment bankers are those investment bankers that operate in a particular region or city. Boutiques are investment bankers that specialize in a particular function of investment banking, such as advising on mergers and acquisitions. The Securities Act of 1933 regulates public offerings of securities and requires full disclosure of information with regard to new security issues. Under this act, issuers of new securities are required to file a “registration statement” with the SECURITIES AND EXCHANGE COMMISSION (SEC) and receive approval from the SEC before the securities can be sold. Issuers are also required to furnish prospective investors with a PROSPECTUS, which is typically incorporated into the registration statement. Criminal and civil penalties will be imposed for false or misleading statements in the registration statement or prospectus, or for noncompliance with the registration and prospectus requirements. Thus, before an investment banker can sell new issues of securities, it must ensure that the new securities issues have been properly registered with and approved by the SEC. The Securities Exchange Act of 1934 regulates secondary trading of securities listed on national securities exchanges and securities that are traded over-the counter and therefore not listed. This act requires disclosure of information on securities traded on national securities exchanges and over the counter. Further, representations of securities must be accurate.
See also BANKING SYSTEM.