Last Updated on March 19, 2022 by QCity Editorial Stuff
There are many significant differences between investment banks and commercial banks. The most obvious distinction is that commercial banks offer traditional banking services such as checking and savings accounts, while investment banks focus on providing more complex financial products and services to their clients. Investment banks typically have a larger footprint in the global markets, while commercial banks are more regional in their focus. Another major difference is that commercial banks are FDIC-insured, while investment banks are not. This means that depositors’ money at a commercial bank is insured up to a certain amount by the government, but deposits at an investment bank are not. Finally, how each type of bank is regulated also differs significantly. For example, investment bankers must adhere to the fiduciary standard.
Commercial banks and investment banks are both types of banks, but they have different functions. Commercial banks provide loans and deposit services to individuals and businesses, while investment banks are involved in securities trading and underwriting. There are also some key regulatory differences between commercial and investment banks. In the wake of the financial crisis, there was a lot of discussion about whether the distinction between commercial and investment banks should be eliminated, but so far it has remained in place. Here we’ll take a closer look at the differences between these two types of banks.
Comparison between Investment banks and Commercial banks
| Parameters of comparison | Investment banks | Commercial banks |
| Owned | Investment banks are privately owned | commercial banks are publicly traded |
| System | Investment banks underwrite securities such as stocks or bonds for their clients | Commercial banks take deposits from customers and provide loans to individuals, companies, and other financial institutions |
| Offer | Both investment and commercial banks offer services like checking accounts, savings accounts, credit cards | Both investment and commercial banks offer services like checking accounts, savings accounts, credit cards |
| Goal | The primary goal of an investment bank is to generate profits through capital gains | the primary goal of a commercial bank is to generate profits through interest charges |
| Insurance | The Federal Deposit Insurance Corporation (FDIC) is the government agency | commercial bank deposits up to $250,000 per account holder |
What are Investment banks?
On the surface, investment banks might seem like a smaller part of the financial industry that deals with securities and other investments. However, they are massive enterprises that dominate world markets in many ways. Investment banks are not only financial institutions; they’re also high-level service providers to corporations, governments, and wealthy individuals who require assistance with large or complex tasks. They provide services such as mergers and acquisitions (M&A), capital raising (such as initial public offerings), wealth management, lending for companies in distress (also known as distressed investing).
Investment Banks’ History: It is believed that investment banking dates back to medieval Italy where merchants would trade shares using bills of exchange which were IOUs or promissory notes issued by the merchants.
What are Commercial banks?
Commercial banks are a type of financial institution that offer a variety of services to their customers, including savings and checking accounts, loans, and credit cards. They are different from other types of banks in that they typically provide more services to businesses than to individuals. Commercial banks can be national or regional institutions, and they are regulated by the government.
A commercial bank is a financial institution that provides commercial and personal banking services. Commercial banks provide loans, mortgages, credit cards, checking accounts, and savings accounts for consumers. They also offer investment products utilizing stocks, bonds, mutual funds, and other securities to individuals or organizations on the corporate side of their business. In terms of total assets held by U.S. commercial banks from 2010 through the first quarter of 2017, JPMorgan Chase Bank was ranked as the largest with $2 trillion in total assets followed by Citigroup with $1.9 trillion in total assets and Wells Fargo & Company with $1.9 trillion in total assets. The three top banks hold about 40%of all US bank deposits which means they have quite a bit of power or over the US economy.
10 Differences Between Investment banks and Commercial banks
1. Investment banks are privately owned while commercial banks are publicly traded.
2. Commercial banks take deposits from customers and provide loans to individuals, companies, and other financial institutions.
3. Investment banks underwrite securities such as stocks or bonds for their clients.
4. Commercial bankers make a profit by collecting interest on the money they lend out.
5. Both investment and commercial banks offer services like checking accounts, savings accounts, credit cards, etc… but investment banking is more focused on trading while commercial banking is more focused on lending.
6. The primary goal of an investment bank is to generate profits through capital gains whereas the primary goal of a commercial bank is to generate profits through interest charges.
7. Commercial banks are not federally insured.
8. Investment banks focus on trading and investment advising.
9. Commercial banks can offer checking, savings accounts, loans, mortgages.
10. The Federal Deposit Insurance Corporation (FDIC) is the government agency that insures commercial bank deposits up to $250,000 per account holder.
Interesting Statistics or Facts of Investment banks
1. The average investment banker earns $180,000 a year.
2. 70% of all investment bankers are male.
3. Investment banks make up 6% of the total number of financial institutions in the US.
4. 5 out of 10 people who graduate from high school with an interest in finance end up working for an investment bank.
5. 75% of investment bankers work more than 50 hours a week at their job.
6. To be considered as an intern at Goldman Sachs, you need to have completed four years worth of undergraduate education and have been accepted into Harvard’s MBA program.
Conclusion
Investment banks are financial institutions that typically have a large degree of control over the companies they invest in, and generally require more capital to maintain their operations. Commercial banks differ from investment banks as they do not usually take equity stakes, but instead lend money to businesses for projects such as buying houses or starting new enterprises. This means commercial bank loans come with lower interest rates than those given by an investment bank. Banks also offer other services like checking accounts and savings plans which can be used online through mobile banking apps. -Commercial Banks: These types of banks don’t take any equity stake in the company; rather, they loan out money at a higher rate (but still cheaper than what you would get on your credit card).
References:
Resources 01: https://www.investopedia.com/terms/i/investmentbank.asp
Resources 02: https://en.wikipedia.org/wiki/Commercial_bank
