Commercial and Investment Banks

Commercial and Investment Banks. What is the difference between Commercial and Investment Banks? This video covers all

Hi everybody let’s in this video understand the key differences between commercial banks and investment banks something i’m sure interests loads of you out there well let’s look at commercial banks uh first very simple functions that commercial banks have like nat west in the uk lloyd’s tsp these are all classic examples of commercial banks their functions are so

Simple to accept savings as we’ve learned from those that have got excess cash to then lend out to borrowers so to convert those savings into loans and to lend out in that sense to act as financial intermediaries right so the idea is give a smaller rate of return on savings compared to the interest rate charged to borrowers and that way they can make profit that’s

Their very simple business model acting as financial intermediaries bringing together savers with borrowers right but also to allow payments from one agent to another so you know you can divert funds from your bank account to businesses for example if you want to pay for goods and services that’s a very important function that commercial banks have as well they

Also offer advice insurance advice financial advice and that is another key function that commercial banks have but you see very simple not hugely profitable the commercial banking side what’s much more profitable is what investment banks do let’s understand that all investment banks get up to is much more lucrative much more profitable much more exciting pure

Investment banks out there for example goldman sachs for example jp morgan it’s ready to see pure investment banks these days you often see a mix between investment banking side and the commercial banking side and we’ll talk about that a little bit later with respect to systemic risk but one key function of investment banks is proprietary trading prop trading and

This is taking any excess capital that investment banks are sitting on and investing it trying to get a better rate of return maybe buying shares buying bonds buying derivatives any kind of financial assets that investment bankers think is going to generate a better rate of return for the investment bank so taking profits and trying to make more profits out of them

Basically very high profile very lucrative very very profitable and therefore if you work in that part of an investment bank boy you can be making big big big money market making this is essentially ensuring that markets can exist so you know for example if you go if you want a second-hand car if you go to a second-hand car dealership you know you can get a car

From there similarly if you want to sell your car you know you can go to a second-hand car dealership and they are going to buy your car up right it is a place where the market exists the same thing can be said of investment banks they’re a place where bonds shares can be bought and sold on behalf of lenders and borrowers it’s a place where you know if you want to

Lend money you can buy bonds from investment bank you can buy shares from there and other financial products from there and if you want to borrow you know that you can go and issue bonds for example through an investment bank shares through an investment bank so in that sense they create a market you always know in the western bank there are going to be shares to

Buy there are going to be bonds to buy that since they’re a market maker we then look at some advisory roles uh mergers and acquisition acquisitions is a key advisory role that investment banks have so if you have a company that’s looking to take over or to merge with another company they might go through an investment bank for advice basically what kind of advice

What advice on when to go through that merger or that takeover how to structure that deal if it’s a cash buyer it’s a share buy whatever it might be due diligence to make sure that everything is is a-okay with the firm that a predator or a the first firm is looking to take over is everything okay with that takeover phone there are no kind of cobwebs or hidden

Secrets with that firm to make sure that all the paperwork is done and meets whatever the regulators want that’s important and to make sure that it goes out into the media in a very successful way in a positive way as well so investment banks can give very important advice when it comes to mergers and acquisitions charging a big fee in the process but also when it

Comes to new issues so if companies want to issue bonds to raise finance or issue shares to raise finance they can go to an investment bank to gain help investment banks can actually put them into contact with people that look to buy these bonds and buy these shares investment banks can publicize them investment banks can write them up for them and issue them for

Them so important roles you know when it comes to publicity they can literally make brochures and and sell these bonds and sell these shares on behalf of the issuers which is very important when these guys want to raise finance they can also getting involved in something called underwriting so nobody wants to buy the new issues of shares or bonds that companies

Are offering investment banks can buy them all up on behalf of that company and then charge a percentage fee on top of whatever that value is making huge sums of money that’s known as underwriting so these are some of the core functions of investment banks i’ve left a couple out because they are very technical you don’t need to know them just need to know these

Core functions nowadays you don’t really see pure commercial banks necessary and pure investment banks necessarily yes there are one or two examples what you tend to see more of are banks like hsbc and barclays that will engage in both kinds of activities they’ll have a commercial bank side or a retail side and they’ll also have an investment bank side now that’s

Important for you to know because then the risk of systemic risk is much greater whereby failures on one side especially the investment bank side can bring down the other side and therefore the risk of the bank failure is much higher and as we know as so many banks are interconnected you know they’ve got liabilities and assets that other banks may have the risk

Of one side failing bringing down the other could then bring down the entire financial system that’s the idea of systemic risk so the more you merge these two activities together in one bank the greater risk there is of the bank failing and because all banks now are interconnected in some way the risk of therefore the whole financial system coming down i.e what

Happened in 2008 is much greater that’s why we say that merging these two sides together increases the risk of systemic risk in the financial system where the whole financial system can come down thank you so much for watching guys hopefully you found that very interesting and you understand it now i’ll see you all in the next video

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Commercial and Investment Banks By EconplusDal