Investment Banks

INVESTMENT BANKS

INDEX

SR. NO. CONTENT PAGE. NO.

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Investment Banks

01 INTRODUCTION 01

02 INVESTMENT BANK AND CAPITAL MARKET 01

03 TYPES OF PLAYERS IN INVESTMENT BANKING 04

04 INVESTMENT BANKING IN INDIA 05

05 SKILLS SUGGESTED FOR INVESTMENT BANKERS 06

06 ROLE OF INVESTMENT BANKERS IN DEVELOPING AN ECONOMY 11

07 MAJOR FUNCTIONS OF THE INVESTMENT BANK 12

08 SCOPE OF INVESTMENT BANKS 12

09 INVESTMENT BANK ORGANIZATIONAL STRUCTURE 18

10 ROLE OF FRONT, MIDDLE AND BACK OFFICE IN INVESTMENT BANKING 19

11 TOP TEN INVESTMENT BANKS 24

12 BIBLIOGRAPHY 25

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Investment Banks

INTRODUCTION

A financial intermediary that performs a variety of services. Investment banks specialize in

large and complex financial transactions such as underwriting, acting as an intermediary

between a securities issuer and the investing public, facilitating mergers and other

corporate reorganizations, and acting as a broker and/or financial adviser for institutional

clients. Major investment banks include Barclays, BofA Merrill Lynch, Warburgs, Goldman

Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, Salomon Brothers, UBS, Credit Suisse,

Citibank and Lazard. Some investment banks specialize in particular industry sectors. Many

investment banks also have retail operations that serve small, individual customers.

INVESTMENT BANK AND CAPITAL MARKET

‘Investment Banking’ as the term suggests, is concerned with the primary function of

assisting the capital market in its function of capital market intermediation, i.e. the

movement of financial resources from those who have them means investors, to those who

need to make use of them means issuer for generating profit. Banking & financial

institutions on the one hand & capital market on the other hand are two broad Platforms of

institutional intermediation for capital flows in the economy. Therefore, it could be inferred

that investment banks are those institutions that are the counterparts of banks in the

capital market in the function of intermediation in resources allocation. Investment banks

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Investment Banks

carried on various activities it helps companies and governments and their agencies to raise

money by issuing and selling securities in the primary market. They assist public and private

corporations in raising funds in the capital markets both equity and debt, as well as in

providing strategic advisory services for expansion acquisitions, mergers and other types of

financial transactions.

Investment banking is much wider term than merchant banking as it implies significant fund

based exposure to the capital market. Internationally, investment banking have progressed

both in fund based & fee based segments of industry. In India, the dependence is heavily on

merchant banking, more particularly with issue management & underwriting. However

downturn in primary market has forced merchant banks to diversify & become full fledged

investment banks. Over the decades, backed by evolution & also fuelled by recent

technological developments, investment banking has transformed repeatedly to suit the

needs of the finance community & thus become one of the vibrant & exciting segments of

financial services. The future for investment banks is bright with scope for merchant banks

to convert themselves into investment banks. Much of the investment banking in its present

form, thus owes its origins to the financial market in U.S.A due to which, American

investment banks have been leader in the American & Euro market as well. Therefore, the

term ‘investment banking’ can be said to be American origin. Their counterparts in U.K were

termed as ‘merchant banks’ since they had confined themselves to capital market

intermediation until the U.K & European markets & extended the scope of such businesses.

TYPES OF PLAYERS IN INVESTMENT BANKING

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Investment Banks

Full-Service Firms- These are type of investment banks who have significant presence in all

areas like underwriting, distribution, M&A, brokerage, structured instruments, asset

management etc. They are all rounder 0f the game.

Commercial Banks- Commercial Banks operating through “Section 20” subsidiaries referring

to the subsidiaries formed under section 20 of the Glass- Steagall Act which were allowed to

carry on limited investment banking services.

Boutique Firms-These are the type of players which specialist in particular areas of

investment banking.

Brokerage Firms- These firms offers only trading services to retail & institutional clients.

They have huge investor base which is also used by underwriters to place issues.

Asset Management Firms- These firms offer on investment services. This includes activities

like fund management, wealth management, cash management, portfolio management

depending on the type of investors, tenure of corpus, purpose of investments, type of

instrument invested in etc.

INVESTMENT BANKING IN INDIA

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Players in Investment

Banking

Full-Service Firms

Commercial Banks

Boutique Firms

Brokerage Firms

Asset Management

Firms

Investment Banks

The bane of Indian capital market today is lack of investor confidence. This is reflected in the

poor performance of both primary & secondary markets. The causes for existing situation

are many but primarily arise on account of lack of liquidity, unscrupulous issuers &

merchant bankers & poor or unappraised issues. Investment banking can solve this problem

because investor would be dealing with reputed investment banker in the primary market

rather than unknown issuers. The investment banks whatever be their issue management

techniques have their own capital on hold. The issues are likely to be properly appraised &

priced & sponsors on OTCEI have a two year lock-in period. Similarly investment banks

would hold the issues until market conditions are appropriate for issue, thus reducing the

risk exposure of investors in gestation for issue. Moreover, the price of reissue will be a

better indicator of issue’s performance. Investment banks make the primary market

subscription. In sum, the quality of pricing, appraisal, & primary market functions will

improve resulting in substantial improvement in investor confidence. Since the investment

banker lends its name to the issue it will imply an issue investors can trust. Investment

bankers may gradually replace merchant bankers in India.

SBI was the first Indian public sector bank to set up its investment banking division in

1972. �SBI Caps and IDBI Caps are two prime examples of investment banks in India

today.Currently, there are 300 investment banks registered with SEBI.Currently, without

holding a certificate of registration

granted by the Securities and Exchange Board of India,

no person can act as a investment banker.

SKILLS SUGGESTED FOR INVESTMENT BANKERS

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Investment Banks

Technical Skill

Academic Background- In the early days of investment banking, not much importance

was attached to academic background. Today, the business has become very

complicated and the skill requirements have multiplied. Consequently, investment banks

find it important to recruit people with the right academic credentials. Typically, for

most of the important jobs, an MBA is a must. Investment banks rely heavily on campus

recruitments

Conceptual Soundness- One of the major benefits for a professional in an investment

bank is the learning associated with work. The financial skills of an expert are tested to

the core while handling a complicated deal. Comprehensive and in-depth knowledge of

financial and business concepts are essential to sustain business. Multiple relationships

between various factors render decision-making difficult. Financial solutions can be

provided to the clients only when the advisor is competent to understand all or at least a

majority of them. Before practical solutions emerge, the tools for decision-making will

give greater choice to the solution provider. A strong grounding in theory and concepts

facilitates this.

Product Specialization- One way to specialize in an investment bank is through

products. An expert in a particular product, say hybrid instruments, can work out

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Academic BackgroundConceptual SoundnessProduct SpecializationLegal KnowledgeKnowledge of Capital Markets and FunctioningKnowledge of Regulatory Bodies involved in the Various OperationsKnowledge of International Business Scenario and Economic TrendsKnowledge of Software Tools, Developments in the Field of Information Technology

Technical Skill

Ability to Cater to the Audience According to its Awareness Levels- Negotiation SkillsPersonality Traits

Communication Skills

Marketing SkillsInter-Personal SkillsNetworking Skills

Other Skills

Investment Banks

financial solutions for any client across the industries. Each client has his or her

individual risk taking ability. To cater to the client on an in basis, appropriate products

that would suit their risk profile should be identified. The clients will also feel at home

while dealing with a product specialist.

Legal Knowledge- While clear cut guidelines can be issued to the traders regarding their

market related activities that are governed by the law, the complexity multiplies for an

M&A deal. The regulators’ guidelines have to be strictly followed, even while envisaging

a combination. Legal knowledge is also important for structuring such deals, which will

help identify the constraints associated with proposed solution. The situation gets more

intense when the deal is a cross-border M&A proposal. Apart from the knowledge of the

inland laws, foreign laws also have to be considered. Any regulation by the foreign

government can make an otherwise desirable deal, unviable.

Knowledge of Capital Markets and Functioning- More than any other industry, it is the

investment banking industry that has a direct bearing on the way capital markets

function. Any changes in the capital market regulations affect the brokerage side of the

business, along with the trade clearing and settlement houses. The trading personnel

should be conversant with the regulations, guidelines, procedural formalities and actual

trade execution processes involved in capital market. E.g. Trading system involves a lot

of additional skills than online trading. He has to be conversant with the codes, symbols

and conventions followed by the market. Quick signaling and accurate interpretation are

of utmost significance. Any mistake in these would lead to faulty execution of orders and

might entail additional costs to the firm in correcting the errors.

Knowledge of Regulatory Bodies involved in the Various Operations- It is necessary for

an investment banker to be aware of all the regulatory bodies that govern the activities

in which he/she is involved. A thorough knowledge of all such bodies is absolutely

essential to perform extraordinarily. In India, the SEBI & central bank acts as a watchdog

and regulator of market related activities.

Knowledge of International Business Scenario and Economic Trends:-Though a

researcher is primarily involved in economic and business cycle studies, it is the duty of

all the investment bankers to have a general overview of these affairs. Salespersons,

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Investment Banks

who also act as financial consultants/advisors, should essentially be aware with

economic and business cycles, lest they lose the respect and trust of the client. The

requirement for global perspective and international exposure is becoming increasingly

important. The firm should offer services across the national borders to the corporate

clients and informed services are possible only when the employee is well-equipped

with international business information.

Knowledge of Software Tools, Developments in the Field of Information Technology-

One of the most important technical skills is the usage of computers, tools and internet

technologies. Marketing, brokerage, research and capital mobilization have all

undergone sweeping changes owing to technology.

The securities trader has changed into a tech-savvy professional, executing online orders

& maintaining databases. The technology helps management and other departmental

professionals and even the clients to disseminate such data in negligible time. Asset

managers have now complicated tools for scientific and in-depth valuation of portfolios.

Comp frameworks can be solved with minimum effort using technology.

Communication Skills

Ability to Cater to the Audience According to its Awareness Levels- Communication

skills include both the means of communication — written and oral. However, the

audiences vary extensively, and hence, the requisite communication skills also differ

widely. A marketer handling individual investors will necessarily have to keep the

content very simple and express t in layman’s terms. Usage of financial terms & jargons

will not fetch results. Cash flows, the characteristics of the instruments & the risk class

to which the investment belongs to must be explained in simple & easily understandable

terms.

Negotiation Skills- Negotiation skills is important at a variety of places. Institutional

clients have to be convinced about the prospects of the investments that are solicited by

the firm. Investors in syndicated debt must be satisfied with the payment streams and

interest rate terms. M&A transactions are the toughest assignments for negotiations.

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Investment Banks

Even a friendly transaction would be difficult if not for patient and mutually

negotiations. The common issues that pertain to negotiation are — terms of offer, offer

price, post merger integration, organization and reporting structure, business lines to be

developed above all dealing with the overlapping functions. While negotiating, the

banker should always keep the prime object in the mind & quickly evaluate the various

counter offers & suggestions made by other party.

Personality Traits- Personality Traits plays an important role in developing the skill set of

an investment banker. Creativity is an important feature. It comes in use while handling

prospectus, clients & team members. It is essential when solutions are to be identified

for complex problem. Innovations & creativity are required structure deals.

Other Skills

Marketing Skills- The marketing skills would be an application of skills mentioned

above. One of the important marketing skill would be relationship management. Unlike

most other industries where relationship plays a facilitating role in conducting business,

it is fundamental issue in the investment banking industry. An attitude for creating,

establishing & maintaining relationships, during boom & down period, is of utmost

importance in getting mandates.

Inter-Personal Skills-Inter-personal skills are basically blended from communication

skills, and personality traits. They include interactions with superiors, subordinates,

colleagues, clients, competitors, team members and even politicians and public office

bearers. Inter-personal skills come to the fore during team exercises where diplomacy

and manners become essential. Team exercises can also include dealing with members

from other departments or even with other firms. Such situations call for greater

application of team skills and an element of mutual respect towards each other.

Networking Skills- Networking refers to the process of developing a web of contacts and

acquaintances. Some of the special attributes required to develop networking abilities

would include:

• Knowledge of human psychology;

• Presence of mind to apply the appropriate skills as situation demands;

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Investment Banks

• Approaching through proper channels that would lend credibility respectability to

contacts;

• Persuasion skills;

• Highest standards of professionalism.

ROLE OF INVESTMENT BANKERS IN DEVELOPING AN

ECONOMY.

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Investment BankersBanks &

Financial Investment Institutions (financial econom

y)

Capital Market / M

oney Market (financial econom

y)

Foreign Exchange Market (financial econom

y)

Real Estate / Gold etc (real econom

y)Com

modity futures M

arket (financial economy)

Business activity

Production of goods and services (real economy)

Investors (generate savings)

Investment Banks

MAJOR FUNCTIONS OF THE INVESTMENT BANK

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Investment Banks

Raising Capital & Security Underwriting. Banks are middlemen between a company that

wants to issue new securities and the buying public.

Mergers & Acquisitions. Banks advise buyers and sellers on business valuation,

negotiation, pricing and structuring of transactions, as well as procedure and

implementation.

Sales & Trading and Equity Research. Banks match up buyers and sellers as well as buy

and sell securities out of their own account to facilitate the trading of securities

Retail and Commercial Banking. investment banks now offer traditionally off-limits

services like commercial banking.

SCOPE OF INVESTMENT BANKS

Following are activities of investment banks. They can be allocated into categories such as

“Corporate Finance,” “Capital Markets,” “Wealth Management / Private Client,”

“Alternative Investments,” and the like.

Public Offerings of Debt and Equity Securities

There are four general types of public offerings: 1) Initial public offerings (IPOs) of securities

issued by companies that have never before issued any public securities (normally common

stock is the first security to be issued in an IPO); 2) Initial public offerings of new securities

that companies that are already public have not before issued (e.g., a new class of

convertible debt security); 3) Further public offerings of securities that are already publicly

traded (e.g., the issuance of additional common stock when its price is sufficiently high so

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Raising Capital & Security

Underwriting

Mergers & Acquisitions

Sales & Trading and Equity Research

Retail and Commercial

Banking

Investment Banks

that cost of capital is sufficiently low); 4) Public offerings by company shareholders of

securities that are already publicly traded (e.g., when an original large shareholder, say a

private equity fund, wants to cash out its position).

In the past we could cleanly differentiate debt and equity securities and put them into

separate categories. Investment grade corporate bonds were distinct from high-yield

(“junk”) bonds. Today the old distinctions are fuzzy. Debt and equity are more points on a

continuum than boxes on a chart. Junior subordinated zero-coupon convertible debentures

can be thought more equity than debt and dutch-auction preferred stock can be thought

more debt than equity. Geography, as well, is no longer a constraint: Companies can reach

anywhere in the world to lower their cost of capital.

Private Placements of Debt and Equity Securities

Private placement is the selling of securities to investors without the regulatory

requirements of public offerings. The regulations defining private placements are complex

and the securities and investment vehicles offered are numerous. Ranging from corporate

equities to real estate interests, privately placed securities carry a higher return than

similarly structured securities that can trade in the public markets. The loss of liquidity

enhances risk and therefore requires a proportionally higher return.

Mergers and Acquisitions (M&A)

This is the front-page stuff – the huge acquisitions, takeover battles, hostile attacks and

fierce defenses. But it’s not all war. The vast majority of M&As are friendly. Investment

bankers seek to optimize price and terms, so that the “best price” may not be the highest

price for client sellers (all cash or confidence in closing may be more important) nor the

lowest price for client buyers (certainty of getting the deal done may be more vital).

Investment banks find, facilitate, price, and finance mergers and acquisitions. Also included

in M&A are leverage buyouts by private equity, the restructuring and recapitalization of

companies, and the reorganization of troubled companies.

Financial Advisory / Sponsor Group Finance

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Investment Banks

Financial advisory services have grown dramatically as investment banks work with the large

number of private funds – hedge funds and private equity – that have mushroomed in

recent years and control hundreds of billions of dollars. Services include (i) raising of capital

for general funds, (ii) M&A acquisitions, (iii) financing acquisitions, (iv) IPOs of portfolio

companies owned by the funds (when appropriate) and (v) M&A of these companies (when

IPOs are not appropriate). Investment banks like to involve themselves with hedge funds

and private equity since they are transaction oriented, generate huge fees and are in

perpetual deal mode.

Fairness Opinions

Fairness opinions support M&A, leveraged buyouts and restructurings for public companies.

Providing an independent, defensible, expert statement on values and the “fairness” of

those values is an essential part of any such public transaction. Investment banks command

what may seem to be exorbitantly high fees for giving fairness opinions, considering the

number of hours worked (and the amount of paper produced). The reason is the significant

liability the investment bank assumes, which can be realized both in the courts via

shareholder suits and in industry reputation. In fact, major investment banks do not like to

provide fairness opinions – the risks are too high for the fees – but generally do so only to

serve important clients.

Structured Finance / Securitization

The creation of synthetic financing mechanisms and structures makes possible allocations of

capital with better risk-return features for both issuers and investors. This is generally

achieved by instruments that (i) pool assets, (ii) allocate liabilities into different “trenches”

(with different risk-return profiles), and (iii) are contained within an independent legal

entity.

Securitization is the process by which formerly illiquid assets, mostly small consumer

receivables of all kinds (e.g., home mortgages, automotive loans, credit card receivables),

can be liquefied by their being “rolled up” into large, publicly tradable securities with

improved risk-return for both issuers and investors. (Such innovations exemplify investment

banking’s contribution to financial markets.)

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Investment Banks

Securitized obligations are sophisticated in design and often require statistical analysis and

sensitivity testing of key criteria (e.g., default rates, prepayment profiles, interest rate

sensitivity, tax changes, etc.). For example, a change from forecasted rates of prepayment

(e.g., due to interest rate declines and the resulting refinancing of older, higher-rate

mortgages) can result in shocking differences in returns from initial expectations. (Principal

itself can suffer significantly.)

Other kinds of structure finance include project finance, which is used to fund large-scale

enterprises such as power plants and infrastructure.

Risk Management

Hedging positions in interest rates, foreign currency exchanges and commodity positions

through swaps, options and futures are an essential building block of financial markets.

Swaps are the mechanism by which two or more parties exchange their debt obligations in

order to control more precisely each party’s desired risk/return profile. Swaps work because

different entities have different comparative advantages when pricing different categories

of debt in different financial markets. Parties of dissimilar credit ratings or financing needs

can exchange their obligations (e.g., from shorter term to longer term and vice versa) in

order to optimize their financial strategy and structure. Risk management groups combine

expertise in diverse hedging instruments to develop a complete hedging strategy for

enterprises.

Merchant Banking

Merchant banking is the commitment of an investment bank’s own capital to equity-level

investments and participations, seeking very high returns. Such commitment of capital is

made for two general purposes: 1) to facilitate a client transaction (i.e., a bridge loan until

permanent financing is obtained); or 2) to purchase securities in an operating company for

the firm’s own account (i.e., whether 100% ownership by the investment bank, in

partnership with a client, or as the manager of an LBO[BP1] fund). Bridge loans are highly

profitable, combining commitment fees, placement fees, high interest rates,and equity

kickers.

Public Trading of Debt and Equity Securities

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Investment Banks

Most large investment banks maintain strong trading capabilities, which is a significant

though volatile profit center – profits are made both from commissions generated by

trading for clients and from capital appreciation generated by trading for the firm’s own

account. Investment banks act as brokers, dealers, and/or market makers (which can differ

for different securities). In addition to traditional stocks and bonds, money market

instruments and commodities (e.g., gold, silver, coffee, crude oil, various metals, various

foods), investment banks create “synthetic securities” (e.g., striped Treasuries, interest only

and principal only instruments), which by appealing to different investors, enhance the risk-

return for all.

Brokers are commissioned agents who represent either buyers or sellers and work much as

do real estate agents; they carry no securities in inventory and therefore assume no risk in

price variation or interest-charge. Dealers set bid-and-ask prices for each security they offer

for trade; by maintaining an inventory of securities, dealers assume a price risk since the

market may go up or down during the time they hold the securities. Market Makers

establish (and support) the entire market for a security on either side of a transaction.

Brokers and dealers are regulated by the various exchanges of which they are members and

the National Association of Securities Dealers (NASD), which is the self-regulating

organization to which they all belong.

Investment Research and Security Analysis

For decades, the research capabilities of an investment bank’s security analysts were often

the firm’s most prestigious and visible strength. (More recently, M&A, IPOs, LBOs, and

private equity / hedge funds have usurped the limelight.) Indeed, many investment banks

used the reputation derived from their investment analysis expertise to develop

underwriting and money management businesses. Typical subdivisions are Global Equities

and Fixed-Income. Today, after various scandals and prosecutions, investment banks must

enforce strict compartmentalization between their corporate finance and investment

research departments (the so-called “Chinese Wall”).

Wealth Management

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Investment Banks

The accumulation of vast wealth by institutional investors (i.e., pension and insurance

funds), and by rich and super-rich individuals, has made money management a vital

business. (For individuals, the departments are called “private banking” or “private client.” )

Investment banks compete with one another, and with large commercial banks and

specialized money management firms in accumulating assets under management. Hundreds

of billions of dollars are at stake.

Alternative Investments

The investments in financial products other than exchange-traded stocks and bonds have

become a huge business, such as private equity, real estate, arbitrage, international, and the

like. The development of funds under management, including private equity and hedge

funds, has increased dramatically, and investment banks both develop their proprietary

products and sell others.

Public / Government Finance

The raising of money for governments (“sovereigns”) at all levels: national governments,

state governments, county and municipal governments. Also included is working with

national governments in the privatization of government assets

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Investment Banks

INVESTMENT BANK ORGANIZATIONAL STRUCTURE

Investment banking is split into front office, middle office, and back office activities. While

large service investment banks offer all lines of business, both "sell side" and "buy side",

smaller sell-side investment firms such as boutique investment banks and small broker-

dealers focus on investment banking and sales/trading/research, respectively.

Investment banks offer services to both corporations issuing securities and investors buying

securities. For corporations, investment bankers offer information on when and how to

place their securities on the open market, an activity very important to an investment bank's

reputation. Therefore, investment bankers play a very important role in issuing new security

offerings.

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Invesment Banking

Front Office Middle Office Back Office

Investment Banks

ROLE OF FRONT, MIDDLE AND BACK OFFICE IN INVESTMENT BANKING

Front office

Front office is generally described as a revenue generating role. There are two main areas

within front office, i.e. Investment Banking and Markets.

Investment Banking involves advising the world's largest organisations on mergers,

acquisitions, as well as a wide array of fund raising strategies. This is, on average, the most

prestigious and highest paid department in the bank with first year analysts typically making

£60,000 upwards (depending on individual, team and firm performance).

Markets is divided into sales, trading, some research and also structuring.]

Investment banking

Corporate finance is the traditional aspect of investment banks which also involves helping

customers raise funds in capital markets and giving advice on mergers and acquisitions

(M&A). This may involve subscribing investors to a security issuance, coordinating with

bidders, or negotiating with a merger target. Another term for the investment banking

division is corporate finance, and its advisory group is often termed "mergers and

acquisitions". A pitch book of financial information is generated to market the bank to a

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Front OfficeInvestment bankingSales & TradingResearch

Middle OfficeRisk ManagementInternal ControlCorporate treasury

Back Office Operation Technology

Investment Banks

potential M&A client; if the pitch is successful, the bank arranges the deal for the client. The

investment banking division (IBD) is generally divided into industry coverage and product

coverage groups. Industry coverage groups focus on a specific industry – such as healthcare,

public finance (governments), FIG (financial institutions group), industrials, TMT

(technology, media, and telecommunication) – and maintains relationships with

corporations within the industry to bring in business for the bank. Product coverage groups

focus on financial products – such as mergers and acquisitions, leveraged finance, public

finance, asset finance and leasing, structured finance, restructuring, equity, and high-grade

debt – and generally work and collaborate with industry groups on the more intricate and

specialized needs of a client.

Sales and trading

On behalf of the bank and its clients, a large investment bank's primary function is buying

and selling products. In market making, traders will buy and sell financial products with the

goal of making money on each trade. Sales is the term for the investment bank's sales force,

whose primary job is to call on institutional and high-net-worth investors to suggest trading

ideas (on a caveat emptor basis) and take orders. Sales desks then communicate their

clients' orders to the appropriate trading rooms, which can price and execute trades, or

structure new products that fit a specific need. Structuring has been a relatively recent

activity as derivatives have come into play, with highly technical and numerate employees

working on creating complex structured products which typically offer much greater

margins and returns than underlying cash securities. In 2010, investment banks came under

pressure as a result of selling complex derivatives contracts to local municipalities in Europe

and the US.[4] Strategists advise external as well as internal clients on the strategies that can

be adopted in various markets. Ranging from derivatives to specific industries, strategists

place companies and industries in a quantitative framework with full consideration of the

macroeconomic scene. This strategy often affects the way the firm will operate in the

market, the direction it would like to take in terms of its proprietary and flow positions, the

suggestions salespersons give to clients, as well as the way structures create new products.

Banks also undertake risk through proprietary trading, performed by a special set of traders

who do not interface with clients and through "principal risk"—risk undertaken by a trader

after he buys or sells a product to a client and does not hedge his total exposure. Banks seek

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to maximize profitability for a given amount of risk on their balance sheet. The necessity for

numerical ability in sales and trading has created jobs for physics, computer

science, mathematics and engineering Ph.D.s who act as quantitative analysts.

Research

The securities research division reviews companies and writes reports about their prospects,

often with "buy" or "sell" ratings. Investment banks typically have sell-side analysts which

cover various industries. Their sponsored funds or proprietary trading offices will also have

buy-side research. While the research division may or may not generate revenue (based on

policies at different banks), its resources are used to assist traders in trading, the sales force

in suggesting ideas to customers, and investment bankers by covering their clients. Research

also serves outside clients with investment advice (such as institutional investors and high-

net-worth individuals) in the hopes that these clients will execute suggested trade

ideas through the sales and trading division of the bank, and thereby generate revenue for

the firm. Research also covers credit research, fixed income research, macroeconomic

research, and quantitative analysis, all of which are used internally and externally to advise

clients but do not directly affect revenue. All research groups, nonetheless, provide a key

service in terms of advisory and strategy. There is a potential conflict of interest between

the investment bank and its analysis, in that published analysis can affect the bank's profits.

Middle Office

Risk management

Risk management involves analyzing the market and credit risk that an investment bank or

its clients take onto their balance sheet during transactions or trades. Credit risk focuses

around capital markets activities, such as loan syndication, bond issuance, restructuring, and

leveraged finance. Market risk conducts review of sales and trading activities utilizing the

VaR model and provide hedge-fund solutions to portfolio managers. Other risk groups

include country risk, operational risk, and counterparty risks which may or may not exist on

a bank to bank basis. Credit risk solutions are key part of capital market transactions,

involving debt structuring, exit financing, loan amendment, project finance, leveraged buy-

outs, and sometimes portfolio hedging. Front office market risk activities provide service to

investors via derivative solutions, portfolio management, portfolio consulting, and risk

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advisory. Well-known risk groups in JPMorgan Chase, Goldman Sachs and Barclays engage in

revenue-generating activities involving debt structuring, restructuring, loan syndication, and

securitization for clients such as corporates, governments, and hedge funds. J.P. Morgan IB

Risk works with investment banking to execute transactions and advise investors, although

its Finance & Operation risk groups focus on middle office functions involving internal, non-

revenue generating, operational risk controls. Credit default swap, for instance, is a famous

credit risk hedging solution for clients invented by J.P. Morgan's Blythe Masters during the

1990s. The Loan Risk Solutions group within Barclays' investment banking division and Risk

Management and Financing group housed in Goldman Sach's securities division are client-

driven franchises. However, risk management groups such as operational risk, internal risk

control, legal risk, and the one at Morgan Stanley are restrained to internal business

functions including firm balance-sheet risk analysis and assigning trading cap that are

independent of client needs, even though these groups may be responsible for deal

approval that directly affects capital market activities. Risk management is a broad area, and

like research, its roles can be client-facing or internal.

Middle Office

This area of the bank includes treasury management, internal controls, and internal

corporate strategy.

Corporate treasury is responsible for an investment bank's funding, capital structure

management, and liquidity risk monitoring.

Internal control tracks and analyzes the capital flows of the firm, the finance division is the

principal adviser to senior management on essential areas such as controlling the firm's

global risk exposure and the profitability and structure of the firm's various businesses via

dedicated trading desk product control teams. In the United States and United Kingdom,

a comptroller (or financial controller) is a senior position, often reporting to the chief

financial officer.

Internal corporate strategy tackling firm management and profit strategy, unlike corporate

strategy groups that advise clients, is non-revenue regenerating yet a key functional role

within investment banks.

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Investment Banks

This list is not a comprehensive summary of all middle-office functions within an investment

bank, as specific desks within front and back offices may participate in internal functions.[10]

Back Office

Operations

This involves data-checking trades that have been conducted, ensuring that they are not

wrong, and transacting the required transfers. Many banks have outsourced operations. It

is, however, a critical part of the bank.

Technology

Every major investment bank has considerable amounts of in-house software, created by

the technology team, who are also responsible for technical support. Technology has

changed considerably in the last few years as more sales and trading desks are

using electronic trading. Some trades are initiated by

complex algorithms for hedging purposes.

Firms are responsible for compliance with local and foreign government regulations and

internal regulations.

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Investment Banks

TOP TEN INVESTMENT BANKS

According to the Financial Times, in terms of total advisory fees for the whole of 2014, the

top ten investment banks were.

Rank Company Fees ($m)

1. J.P. Morgan & Co. 6,398.67

2. Bank of America Merrill Lynch 5,693.77

3. Goldman Sachs 5,556.45

4. Morgan Stanley 5,310.17

5. Citigroup 4,489.64

6. Deutsche Bank 4,263.81

7. Credit Suisse 3,768.46

8. Barclays 3,706.22

9. Wells Fargo 2,367.32

10. UBS 2,219.69

The above list is just a ranking of the advisory arm (M&A advisory, syndicated

loans, equity capital markets and debt capital markets) of each bank and does not include

the generally much larger portion of revenues from sales and trading and asset

management.

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Investment Banks

BIBLIOGRAPHY

www.wikipedia.org

www.investopedia.com

www.moneycontrol.com

money.livemint.com

http://www.technofunc.com/

www.finance-glossary.com

(For definition of certain financial terms)

Financial Management -by I. M. Pandey

Financial Management- by Ravi Kishor

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