MODULE 5 – Investment Banking
Investment banking is an important function of IB.
Mainly, investment banks are engaged in
underwriting securities to raise capital through initial public offerings.
They also undertake mergers
and acquisitions, whether hostile or friendly, for a fee.
This module will explain the functions of
investment banks, the types of securities they hold in their portfolios, risks they face, and regulatory
We will also look at some examples of financial engineering, which is a part of an investment
bank’s functions and responsibilities.
Upon successful completion of this module, the student should be able to:
• Describe the function of an investment bank.
• Examine and articulate the initial public offering activities by investment banks.
• Describe loan syndication by an investment bank.
• List the due diligence checklist.
• Describe mergers and acquisitions and corporate financing.
• Differentiate between the types of securities that are issued by an investment bank.
• Articulate the activities of merchant banking.
nvestment banking activity evolved like every other aspect of IB.
The financial collapse of
1929 led many people to believe that banking institutions recklessly packaged loans to the point
that they compromised their reserve level and liquidity necessary for safeguarding the bank’s
status as good-standing.
With the Glass-Steagall Act, banks were prohibited from underwriting
corporate securities and separated this function from their day to day orientation and
responsibilities, such as loan packaging, deposit taking and providing saving accounts to their
With this law in place, we can easily assert that the foundation of investment banking
activity was set in place, and evolved into what we see today.
For example, investment banks
perform an elaborate underwriting role for major corporations, from issuance of the security to
its distribution, maintenance and maturity process, which completes their involvement in the said
An investment bank can purchase a security from an issuing company
and sell it to the public.
They can also distribute it to the public without purchasing it.
percentage of an investment bank’s revenue is derived from participating in the role of
Also, investments banks provide consulting services to corporations for mergers
and acquisitions, whether vertical or horizontal, and offer advice to start-up companies on
For further information, please see Footnote #1
Furthermore, an investment banking institution’s functions can be described as underwriting and
marketing securities, consulting and advisory services, currency trading, financial engineering,
merchant banking, and bridge financing.
Moreover, investment bankers are involved in raising
capital in the capital market by selling their stock in the stock market, and often undertake
venture capital activity.
The Glass-Steagall was sunsetted in 1999 and was replaced by the