Evolution of Investment Banks

Post the First World War the US Companies were looking for capital to expand. Besides getting capital from Commercial Banks the companies started raising capital from Stock and Bond Markets These were generally supported by Brokers (Securities dealers)

Contd
The Business firms were finding it easier and got favorable terms from the Market (Stock and Bond) to raise capital for funding their Growth. The Brokers were getting huge Underwriting commission for this To capitalize on this opportunity the Commercial banks started taking over the broking firms or forming subsidiaries that under took underwriting activity

Contd..
The markets grew so did the investment banks, but by late 1920s the markets went to absurd levels and valuations The IBs were Borrowing money from the parent bank and speculating in the stock market Finally the bubble burst in 1929 and stock market crash wiping out millions of dollars- Bank of United States went down

Separation of IB and Commercial Banking in the US

In 1933 the Banking act popularly known as the Glass Steagle Act was passed in the US that prohibited Commercial Banks from underwriting issues or doing Investment Banking activity However with passage of time the water shed compartment between the IB and Commercial banking activity was diminished and in 1999 the GLASSSteagle Act was repealed

TYPES of BANKS
The advent of globalization (funds started moving from one part of the world to another) and need of the clients to have both the services under one roof. This lead to rise of Universal Banks (Commercial Banking + Investment Banking + Insurance) State bank of India, SBI Capital Markets, SBI Life There are Pure Investment Banking companies in the world too (Merrill Lynch and Company, Bear Sterns)

Contd
Boutique Banks- The Investment Banks that special in certain areas (segments) and cater to Niche clients (e.g. specialist in Merger and Acquisition activity) The major revenue of leading IBs of world comes by Proprietary Trading. Revenue from Advisory services comes next.