Investment banking-Introduction-Investment banking services-Underwriting and types-Investment bank structure-Types of Investment banks- Commercial banks VS. Investment bank - Role of Investment banking in Financial market - Role of Investment banks during the last financail crisis 2008.

1. UNIT-1
INTRODUCTION TO INVESTMENT BANKING
Meaning:
Investment banking refers to a division of banking that specializes in helping
companies, governments, and other institutions raise capital. This can involve
underwriting new debt and equity securities, assisting in mergers and
acquisitions (M&A), providing advisory services for financial transactions, and
facilitating the buying and selling of securities. Investment banks act as
intermediaries between issuers of securities and the investing public, helping
to ensure that transactions are executed efficiently and effectively.
Here are some prominent examples of investment banks:
1. Goldman Sachs
Based in the U.S., Goldman Sachs is a global leader in investment
banking, offering a range of services including asset management, wealth
management, and securities underwriting.
2. Morgan Stanley
Another major American investment bank, Morgan Stanley specializes in
wealth management, institutional securities, and investment
management.
3. J.P. Morgan (J.P. Morgan Chase & Co.)
Known as one of the world's largest financial institutions, J.P. Morgan
provides investment banking, asset management, and private banking
services worldwide.
4. Bank of America Merrill Lynch (BofA Securities)
The investment banking arm of Bank of America, BofA Securities
provides services in capital markets, M&A advisory, and risk
management.
5. Citi (Citigroup)
Citigroup’s investment banking division provides capital markets
services, advisory on mergers and acquisitions, and other financial
services across the globe.
6. Deutsche Bank
Germany’s largest bank, Deutsche Bank offers investment banking
services in areas such as debt and equity underwriting, advisory, and
wealth management.

2. History of Investment Banking in India
The history of investment banking in India traces back to when European
merchant banks first established trading houses in the region in the 19th
century. Since then, foreign banks (non-Indian) have dominated investment
and merchant banking activities in the country.
In the 1970s, the State bank of India entered the business by creating the
Bureau of Merchant Banking and ICICI Securities became the first Indian
financial institution to offer merchant banking services.
By 1980, the number of merchant banks had risen to more than 30. This
growth in the financial services industry included the rapid expansion
of commercial banks and other financial institutions.
Investment banking began in the 17th century with merchants financing trade
and grew through industrialization and wars, leading to modern banks raising
capital, advising on mergers, and innovating with new financial products,
though it faced strict regulations after crises like the Great Depression and
2008 financial meltdown.
The investment banking industry experienced significant growth during the
late 19th and early 20th centuries, establishing well-known firms like J.P.
Morgan, Goldman Sachs, and Morgan Stanley.
NEED OR ROLE OF INVESTMENT BANKING:
Investment banking plays a crucial role in the economy and the financial
markets by facilitating capital flow and providing specialized financial services.
Here are key reasons for the need for investment banking:
1. Raising Capital
 Investment banks help companies, governments, and other organizations
raise funds through equity (stock issuance) or debt (bond issuance). This
enables businesses to expand, governments to finance infrastructure
projects, and startups to grow.
2. Mergers & Acquisitions (M&A) Advisory
 Investment banks advise companies on mergers, acquisitions,
divestitures, and restructuring. Their expertise in valuing companies,

3. negotiating deals, and managing complex transactions allows businesses
to grow, improve efficiency, or reposition strategically.
3. Market Making and Liquidity
 Investment banks act as intermediaries, buying and selling securities to
ensure that markets remain liquid and efficient. This helps investors
easily trade assets and promotes stability in financial markets.
4. Risk Management and Hedging
 Investment banks provide risk management tools like derivatives and
hedging strategies that help companies and institutions manage
exposure to various risks, such as currency fluctuations, interest rates,
or commodity prices.
5. Research and Insights
 Investment banks produce research and market analysis, helping
investors, businesses, and governments make informed decisions. Their
research covers economic trends, industry performance, stock
recommendations, and more.
6. Facilitating Initial Public Offerings (IPOs)
 When companies go public, investment banks manage IPOs by
underwriting the issuance of new shares. This process involves assessing
the company's value, setting a price, and promoting the stock to
potential investors.
7. Wealth and Asset Management
 Many investment banks offer asset and wealth management services,
helping individuals and institutions manage their portfolios, achieve their
financial goals, and grow their investments.
8. Specialized Financial Expertise
 Investment banks provide highly specialized expertise in finance and
legal frameworks, which are invaluable for large or complex financial
transactions that require detailed knowledge of tax laws, international
markets, and regulatory requirements.
9. Globalization and Cross-Border Transactions

4.  Investment banks support global expansion and cross-border
transactions, allowing companies to tap into international markets,
navigate foreign regulations, and manage foreign currency risks.
10. Economic Growth and Development
 By facilitating the efficient allocation of capital and advising on strategic
transactions, investment banks contribute to economic growth,
development, and the overall health of the financial system.
In summary, investment banks serve as intermediaries and advisors for
complex financial needs, which enables businesses, investors, and
governments to grow and manage risks effectively in a dynamic global
economy.
Roles within Investment Banks
 Investment Bankers: Focus on client relationships and deal execution.
 Analysts: Conduct research and analysis to support deal-making and
trading.
 Traders: Buy and sell securities on behalf of clients or the bank.
 Salespeople: Communicate with clients to sell financial products and
services.
Importance of Investment Banking
 Provides essential financial services that help companies grow and
thrive.
 Facilitates capital flow in the economy, promoting overall economic
growth.
nvestment banking services include a range of financial activities aimed at
helping companies, governments, and other organizations raise capital,
manage risk, and make strategic decisions. Here are the main services offered:
1. Underwriting and Capital Raising
 Equity Issuance: Investment banks help companies raise funds by
issuing stock (equity), often through Initial Public Offerings (IPOs) or
secondary offerings.
 Debt Issuance: Investment banks also help companies issue debt
(bonds) to raise capital.

5.  Underwriting: The bank may purchase securities from the issuer and
sell them to investors, assuming some of the financial risk involved in
the sale.
2. Mergers and Acquisitions (M&A) Advisory
 Investment banks advise companies on buying, selling, merging, or
restructuring businesses.
 They assist in deal structuring, valuation, negotiation, and due
diligence.
 M&A services aim to maximize value for clients and ensure successful
transactions.
3. Sales and Trading
 Investment banks facilitate the buying and selling of securities for clients
and the bank itself.
 Market Making: Some banks act as market makers, meaning they buy
and sell securities to provide liquidity in the market.
 Risk Management: Banks offer solutions like derivatives trading to help
clients manage financial risk.
4. Research and Analysis
 Investment banks conduct detailed research on markets, companies, and
economic trends.
 Research analysts produce reports that help investors make informed
decisions.
 Research also supports other areas like trading, sales, and M&A advisory
by providing insights.
5. Asset Management
 Investment banks manage assets and investment portfolios for
individuals, corporations, and institutions.
 They provide advice and manage funds to meet clients' investment
objectives, focusing on growth, risk management, or specific financial
goals.
1. encourage risky behavior.
Underwriting: Meaning and Overview

6. Underwriting is the process by which a financial institution, such as a bank,
insurance company, or investment firm, evaluates the risks associated with
providing financial services like loans, insurance policies, or securities. The
underwriter assesses the potential risks and determines the terms, conditions,
and pricing for the service offered.
The term originates from the practice of insurers writing their name under the
risk they agree to take on in exchange for a premium. Today, underwriting is a
crucial component in finance, helping institutions mitigate risks and make
informed decisions.
Types of Underwriting
1. Insurance Underwriting
 Involves evaluating the risks of insuring an individual or entity.
 Determines the coverage, premium, and exclusions in the policy.
 Example: Health, life, auto, and property insurance underwriting.
2. Loan Underwriting
 Focuses on assessing the creditworthiness of a borrower.
 Factors like credit score, income, debt, and repayment history are
considered.
 Types:
o Mortgage underwriting.
o Personal loan underwriting.
o Business loan underwriting.
3. Securities Underwriting
 Deals with the evaluation of risks associated with issuing securities.
 Involves investment banks that act as intermediaries between the issuer
and investors.
 Types:
o Firm Commitment: The underwriter guarantees the purchase of
all securities.
o Best Efforts: The underwriter sells as many securities as possible
without guaranteeing the entire sale.
o All-or-None: The offering is canceled if all securities cannot be
sold.

7. 4. Equity Underwriting
 Specific to issuing shares or stocks to the public.
 Helps companies raise capital while mitigating risks for investors.
5. Reinsurance Underwriting
 Involves insurers transferring a portion of their risk to another insurer
(reinsurer).
 Reinsurers evaluate the primary insurer's portfolio before accepting the
risks.
Key Principles of Underwriting
 Risk Assessment: Identifying and analyzing potential risks.
 Pricing: Setting appropriate premiums, interest rates, or terms based on
risk levels.
 Decision Making: Approving, modifying, or rejecting applications.
 Compliance: Ensuring all underwriting practices follow regulatory
standards.
Importance of Underwriting
 Protects financial institutions from excessive losses.
 Ensures fair pricing and terms for clients.
 Facilitates informed decision-making in financial transactions.
Types of Investment Banks:
Investment banks are financial institutions that provide a range of services,
including underwriting, mergers and acquisitions (M&A), advisory, and asset
management. They can be classified based on their size, geographic reach, and
specialization.
1. Bulge Bracket Banks
 Definition: The largest and most prestigious investment banks with
global operations.
 Characteristics:

8. o Offer a full range of investment banking services.
o Operate on a global scale with offices in major financial hubs.
o Work with large corporations, governments, and institutions.
 Examples:
o Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup,
Bank of America Merrill Lynch.
 Services Provided:
o IPOs, M&A, wealth management, proprietary trading, and
research.
2. Middle Market Investment Banks
 Definition: Banks that serve mid-sized businesses and organizations.
 Characteristics:
o Focus on regional or national markets rather than global
operations.
o Typically handle deals valued between $50 million and $500
million.
 Examples:
o William Blair, Houlihan Lokey, Jefferies, Raymond James.
 Services Provided:
o M&A advisory, debt and equity financing, and restructuring
services.
3. Boutique Investment Banks
 Definition: Smaller, specialized banks offering niche services or focusing
on specific industries.
 Characteristics:
o Provide tailored services and personalized attention.
o Often specialize in M&A, restructuring, or industry-specific
advisory.
 Examples:
o Evercore, Lazard, Moelis & Company, Greenhill & Co.
 Specialization Areas:
o Technology, healthcare, energy, or real estate.
4. Regional Investment Banks
 Definition: Operate within specific geographic regions, serving local
businesses and governments.
 Characteristics:
o Smaller in scale compared to bulge bracket and middle market
banks.
o Focus on deals and clients within a particular area or country.

9.  Examples:
o Canaccord Genuity (Canada), Piper Sandler (U.S.), Banco BTG
Pactual (Latin America).
 Services Provided:
o Capital raising, advisory, and local market research.
5. Elite Boutique Banks
 Definition: A subset of boutique banks that compete with bulge bracket
banks for high-profile deals.
 Characteristics:
o Specialize in advisory services for large-scale transactions.
o Attract top-tier clients and talent.
 Examples:
o Centerview Partners, Evercore, PJT Partners.
 Focus Areas:
o M&A, restructuring, and strategic advisory.
Role of Investment Banks in Financial Markets
Investment banks play a critical role in the smooth functioning of
financial markets by acting as intermediaries between issuers of
securities and investors. They facilitate capital raising, mergers and
acquisitions, and provide advisory services to corporations, governments,
and institutions.
Key Roles of Investment Banks
1. Capital Raising
 Primary Role: Help organizations raise funds through equity or debt
offerings.
 Methods:
o Equity Financing: Assisting companies in issuing shares via
Initial Public Offerings (IPOs) or follow-on offerings.
o Debt Financing: Helping raise funds through bond issuance or
other debt instruments.
 Impact on Financial Markets:
o Enables companies to access growth capital.
o Provides investors with new investment opportunities.
2. Underwriting
 Definition: Assumes the risk of buying securities from issuers and
selling them to the public or institutional investors.

10.  Types:
o Firm commitment.
o Best efforts.
o All-or-none.
 Impact on Financial Markets:
o Ensures liquidity and confidence in the issuance process.
o Facilitates efficient capital allocation.
3. Market Making
 Definition: Investment banks buy and sell securities to ensure market
liquidity.
 Role in Financial Markets:
o Narrow the bid-ask spread to improve price stability.
o Enable investors to trade securities easily.
4. Advisory Services
 Mergers and Acquisitions (M&A):
o Provide strategic advice on mergers, acquisitions, divestitures, and
restructuring.
o Conduct valuations and negotiate deals.
 Corporate Strategy:
o Offer guidance on financial planning and optimal capital
structures.
 Impact on Financial Markets:
o Facilitate business growth and consolidation.
o Promote efficient resource allocation.
5. Trading and Brokerage
 Role:
o Execute trades on behalf of clients (brokerage).
o Conduct proprietary trading to earn profits.
 Impact on Financial Markets:
o Enhances liquidity and market efficiency.
o Provides price discovery through active trading.
6. Research and Analysis
 Services Offered:
o Provide equity research, sector analysis, and economic forecasts.
o Help investors make informed decisions.
 Impact on Financial Markets:
o Improves transparency and market efficiency.

11. o Reduces information asymmetry.
7. Risk Management
 Services:
o Offer hedging instruments like derivatives to manage risks.
o Assist clients in mitigating exposure to currency, interest rate, or
commodity price fluctuations.
 Impact on Financial Markets:
o Stabilizes markets by reducing uncertainties.
o Encourages investment and economic growth.
8. Wealth Management
 Role:
o Cater to high-net-worth individuals (HNWIs) and institutional
clients.
o Provide personalized investment solutions and portfolio
management.
 Impact on Financial Markets:
o Channels funds into productive investments.
o Supports long-term financial stability.
9. Global Connectivity
 Role:
o Facilitate cross-border investments and international trade.
o Support global economic integration.
 Impact on Financial Markets:
o Encourages foreign investment.
o Promotes diversification and access to international capital
markets.
Importance of Investment Banks in Financial Markets
1. Liquidity Provider: Facilitate buying and selling of securities.
2. Capital Allocation: Channel funds from savers to productive uses.
3. Market Stability: Offer hedging instruments and ensure efficient market
operations.
4. Economic Growth: Drive innovation and expansion by funding
businesses.
5. Transparency and Information: Improve decision-making for market
participants.

12. Role of Investment Banks in the 2008 Financial Crisis
1. Creation and Sale of Mortgage-Backed Securities (MBS):
 Investment banks bundled home loans into Mortgage-Backed
Securities (MBS), which were sold to investors.
 These MBS were tied to subprime mortgages (high-risk loans made to
borrowers with low creditworthiness).
 They were rated as safe investments by credit rating agencies, despite the
underlying risks.
2. Collateralized Debt Obligations (CDOs):
 Banks repackaged MBS into more complex financial products called
Collateralized Debt Obligations (CDOs).
 CDOs masked the risk by pooling different types of debt, including
subprime loans, leading investors to underestimate their volatility.
3. Excessive Risk-Taking:
 Many investment banks were highly leveraged (borrowed heavily to fund
operations), amplifying their exposure to the risky mortgage market.
 They used short-term funding to finance long-term investments, making
them vulnerable to market downturns.
4. Role in the Housing Bubble:
 Banks pushed for more subprime mortgage originations to feed the
demand for MBS and CDOs.
 This contributed to the housing bubble, as more individuals were given
loans they couldn't afford, inflating home prices.
5. Credit Default Swaps (CDS):
 Investment banks and insurance companies like AIG used Credit
Default Swaps (CDS) to insure MBS and CDOs against default.
 CDS created a false sense of security for investors but transferred
significant risk to institutions that could not handle the losses.

13. 6. Lack of Regulation:
 Many of these activities occurred in unregulated markets (shadow
banking system), where transparency was minimal.
 Risk management was inadequate, and conflicts of interest (e.g., banks
betting against products they sold) were common.
7. Collapse of Major Investment Banks:
 Lehman Brothers declared bankruptcy in September 2008, marking a
pivotal moment in the crisis.
 Other investment banks, like Bear Stearns and Merrill Lynch, were
forced into mergers or bailouts due to their exposure to toxic assets.
8. Government Response and Reforms:
 The U.S. government intervened with bailouts for some banks (e.g.,
Goldman Sachs and Morgan Stanley) to prevent systemic collapse.
 Reforms like the Dodd-Frank Act were introduced to increase regulation,
improve transparency, and reduce risky behaviors.