Investment Banking vs. Commercial banking: an overview
Commercial banks and investment banks are both crucial financial institutions in a modern economy, but they perform very different functions. Commercial banks are what most people think of when they hear the term "bank." Commercial banks accept deposits, make loans, protect assets and work with many different types of customers, including the public and businesses.
On the other hand, investment banksprovide services to large companiesand institutional investors. For example, an investment bank can assist with mergers and acquisitions (M&A transactions), issue securities or provide financing for large business projects.
Key learning points
- The crucial difference between the two types of banks is to whom they provide services.
- Commercial banks accept deposits, make loans, protect assets and work with many small and medium-sized businesses and consumers.
- Investment banks provide services to large corporations and institutional investors.
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Commercial banks
Commercial banksusually consists of tellers, sales associates, trust officers, loan officers, branch managers, and technical programmers. There are many commercial banks in your city that operate as local businesses.
Commercial banks make loans, take deposits and provide other account and banking services to their customers. These banks also offer services to small and medium-sized businesses, such as business loans and lines of credit.
The investment bank
Investment banks include consultants, banking analysts, capital market analysts,research staff, trading specialists and many others. There are different types of investment banks, each targeting a different audience.
Types of investment banks
There are generally four types of investment banks: the bulge, the regional shop, the middle market and the elite shop.
A bulge bank is the largest of the investment banks. Examples you may know are Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank. These banks are called full-service investment banks and operate across the financial spectrum, usually globally. Bulge Bracket banks handle clients with more than $500 million in assets, but also offer services to some smaller clients.
Middle market investment banks are one step below the bulge banks. They generally offer the same products and services, albeit on a smaller scale than the bulging banks. Middle market investment banks serve clients with assets between $5 million and $500 million.
A regional boutique investment bank is the smallest of all investment banks. Regional stores specialize in specific initiatives such asmergers and acquisitions, personal investment management or other niche investment services.
Elite boutique banks generally offer a much smaller range of services such as wealth management,restructuringand M&A-related banking. They are smaller, but process larger financial transactions, similar to the bulge banks.
Main differences
| The investment bank | Commercial banks | |
|---|---|---|
| clientele | Investors, companies, government | Small and medium-sized enterprise |
| Primary services | Assisting institutional investors and companies with financial needs | Loans, mortgages, deposit accounts for small and medium businesses |
| Other services | Asset and asset management, brokerage services, financial advice | Mobile banking, credit cards, mergers and acquisitions |
| Surplus | Of fees for services | From fees for services and interest |
Clientele and services
A key difference between commercial and investment banks is their customers. Commercial banks serve consumers and small and medium-sized businesses, providing loans, bank accounts and credit cards. They may also offer online banking, real estate loans and limited investment options.
Investment banks focus on investors, governments and companies. They provide services to companies and wealthy individuals, such as asset and asset management, mergers and acquisitions services, arranging securities and financial advice and audit.
Economic differences
Commercial banksproviding services to small and medium businesses and consumers and making money through interest and fees. For example, a commercial bank may make a loan to a small business and collect interest, which represents income for the bank.
The investment bankmake money with the investment services they provide. For example, an investment bank can help a company issue shares in an initial public offering (IPO) and assist during the IPO process. The bank would charge the company for its services.
Can you make the switch from Commercial Banking to Investment Banking?
If you work at a commercial bank, you'll need additional skills to transition into investment banking, such as financial modeling.
How is an investment different from a commercial bank?
This is where the investment banks differthey target different clientele. For example, commercial banks serve consumers and some small businesses, while investment banks serve institutional investors and larger corporations.
What are the four main differences between commercial banks and investment banks?
Four significant differences are customer service, the products and services offered, the amount of money in transactions and the rules that must be followed.
What is an example of commercial banking?
Commercial banks are used to make deposits or finance a car loan. An example of this is a Home Trust Bank in North Carolina or a Deerwood Bank in Minnesota. Commercial banks can also operate on a larger scale, such as Citibank and Bank of America.
In short
Commercial banks and investment banks are important in modern society because they serve different purposes. Both types of sofas offer excellent optionsfor career choices. Commercial banks provide services to small businesses and consumersservices for daily banking needs; investment banks provide financial services to institutional investors and larger companies.
