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Investment Banking Essay

1557 words - 7 pages

Difference Between Investment Banking and Merchant Banking

Investment vs. Merchant Banking

Bank is an organization that provides a range of financial and some non financial services to its customers. The main source of income, that makes the bank survive is the interest charged from those to whom the bank has given loan. A bank accepts deposits from its customers and pay interest to that deposited money, while it lends money to those who need finance and charge interest from them. The interest rate chargeable from the borrowers is higher than the interest rate payable to depositors. This is how a bank, which is traditionally known to normal people, earns revenue. Banks can be broadly ...view middle of the document...

Merchant banks do not provide regular banking services to the general public. Nowadays, merchant banks provide underwriting services and consultancy services for wealthy institutions, as well as individuals. Issuance of letter of credit, international fund transfer, foreign corporate investment and foreign real estate investment are some examples of services offered by a merchant bank. Merchant banks offer capital in exchange for share ownership. The main sources of income of a merchant bank are fee for the consultancy that they provided and interest for the capital provided. Some of the financial institutions mentioned above (e.g.: JP Morgan) have begun as merchant banks.


Difference Between Investment Banking and Commercial Banking

Commercial Banking vs. Investment Banking

While regulation has changed the businesses in which commercial and investment banks may now participate, the core aspects of these different businesses remain intact. In other words, the difference between how a typical investment bank and a typical commercial operate bank can be simplified: A commercial bank takes deposits for checking and savings accounts from consumers while an investment bank does not. We'll begin examining what this means by taking a look at what commercial banks do.

Commercial Banking

A commercial bank may legally take deposits for checking and savings accounts from consumers. The federal government provides insurance guarantees on these deposits through the Federal Deposit Insurance Corporation (the FDIC), on amounts up to $100,000. To get FDIC guarantees, commercial banks must follow a myriad of regulations.

The typical commercial banking process is fairly straightforward. Customers deposit money into bank, and the bank loans that money to consumers and companies in need of capital (cash). We borrow to buy a house, finance a car, or finance an addition to customers’ home. Companies borrow to finance the growth of their company or meet immediate cash needs. Companies that borrow from commercial banks can range in size from the dry cleaner on the corner to a multinational firm. The commercial bank generates a profit by paying depositors a lower interest rate than the bank charges on loans.

Importantly, loans from commercial banks are structured as private legally binding contracts between two parties - the bank and customers (or the bank and a company). Banks work with their clients to individually determine the terms of the loans, including the time to maturity and the interest rate charged. Customers’ individual credit history (or credit risk profile) determines the amount customers can borrow and how much interest customers are charged. Perhaps customers’ company needs to borrow $200,000 over 15 years to finance the purchase of equipment, or maybe customers’ firm needs $30,000 over five years to finance the...

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