Ask
an 80-year old uncle what a bank means to him and he will immediately be able
to visualize a small co-operative type of a bank where a limited number of
people from the locality put their limited savings. Ask a 50-year old gentleman
what a bank means to him and he will be able to visualize ICICI. Now, ask a
youngster what a bank means to him and he will instantly think of Goldman
Sachs! Welcome to the changing face of banking in a changing world.
How
did the need for investment banking suddenly arise? It would not be wrong to
say that man’s increasing desire to make more and more money is the root cause
for increasingly complex and often risky ventures. In fact, some white haired
people even look upon stock market trading as another form of gambling. However,
it is not illegal to want to make more money. Investment Banking started off as
a financial advising service. Initially, investment banking functions were
limited to acting at the behest of their clients but now they are even engaged
in proprietary trading. Proprietary trading is business conducted by banks by
themselves. In proprietary trading, investment bank purchase stocks and bonds
as a profit making initiative with their own funds.
Investment
banks are different fundamentally from commercial banks. Investment banks do
not take deposits. This might sound strange. Banks are meant to take deposits
from the public and then lend it out thus enabling recycling of money in the
economy. But the whole foundation of investment law is based on the principle
of segregation. Investment banks have intermediaries in the form of brokers,
underwriters, etc., who act as agents on behalf of the issuers. The money and
other securities like bonds and shares do not become their own as in the case
of commercial banks. They are basically providing a service for which they
receive a fee. In fact, in USA commercial and investment banking were separated
by the Glass Steagall Act, 1933 which was later repealed by the
Gramm-Leach-Bliley Act, 1999, thus enabling commercial, insurance and
investment functions to be exercised by the same banks.
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