eFinancialCareers

Investment banking is a catch-all term that means one thing to some people and something entirely different to others. At its most narrowly defined, investment banking is just about mergers and acquisitions (M&A) and raising money to finance mergers and acquisitions.

More broadly defined however, investment banking covers everything from buying and selling bonds, shares and other financial products, to helping clients' raise money to finance a new factory in Baden-Württemberg, as well as everything involved in M&A activity. We have opted for the broader definition.

Alongside this broader spectrum of investment banking functions, it is possible to add several others that are have not traditionally been considered part of investment banking at all. For example, several banks now manage clients' money through their own fund management arms. As many more help rich individuals cope with the tribulations of having more money than they can spend through their own private banking arms. Similarly, plenty of banks invest money directly in companies with a view to taking a hands-on role in improving their performance and selling their stake later on. They do this through their private equity arms.

To complicate matters further, many so-called investment banks are also now dabbling in areas previously restricted to retail banks and insurance firms. This was made possible by the repeal, in 1999, of the US Glass-Steagall Act. The act was passed in 1933, following the great stock market crash of 1929. It was designed to prevent investment banks from also offering retail banking services, such as taking deposits from and making loans to individual and corporate customers.

With the Glass-Steagall Act out of the way, a new generation of 'universal bank' has emerged. Universal banks offer the entire gamut of investment banking services, as well as making loans to, and taking deposits from, corporate customers. They include: Bank of America, Citigroup, Deutsche Bank, HSBC, and JPMorgan Chase & Co. Conversely, traditional investment banks, such as Goldman Sachs, Morgan Stanley, and Merrill Lynch, offer broad investment banking services and no more.

Universal banks often claim to be superior to mere investment banks on the basis that they can attract clients to their investment banking services by offering them a broader range of services, including cheap loans. However, the universal banking model came under scrutiny following scandals such as Enron, the bankrupt US energy company when some banks were accused of making loans to the company, as well has helping it sell stock to unsuspecting investors, with which to pay those loans off with.