Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the buying and selling of investments, while commercial banks manage deposit accounts.
Investment Banking
Investment banks are institutions that function mainly to serve businesses. They aid companies in the process of purchasing and selling bonds, stocks and a variety of other investments. Investment banks also aid companies in going public by facilitating their initial public offerings, or IPOs.
These banks are allotted higher risk tolerances, in part because of their general business model and because they are somewhat more loosely regulated by the Securities and Exchange Commission, or SEC, granting them substantial freedom in strategic decision making.
Commercial Banks
Commercial banks are responsible for managing deposit accounts, such as checking and savings accounts, for both businesses and individuals. Using money held on deposit enables them to make loans available to the public and to companies.
There is a significantly higher level of government regulation with these institutions. Commercial banks are federally insured to protect customers and are governed more stringently than investment banks by federal authorities such as the Federal Reserve and the Federal Deposit Insurance Corporation, or FDIC. Commercial banks are much more sensitive to risk due to the fact they deal directly with the public.
Combination Institutions
In 1933, the Glass-Steagall Act mandated a separation of all investment and commercial banking. It was repealed over six decades later in 1999. Since then, major banking institutions have been permitted to operate in the investment and commercial arenas. However, while there are some blended institutions, most U.S. banks have chosen to remain as either investment banks or commercial banks.
There are a number of potential benefits to combination investment/commercial banks. For example, acting as an investment bank, an institution can aid a company in selling its IPO, and then utilize commercial banking to extend credit to the new company, thereby simplifying the company’s financing needs.