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Role Of Investment Banking And Its Potential Risks To Real Economy

1679 words - 7 pages

Part B: Role of Investment Banking and its potential risks to real economyIntroductionInvestment banking is another service besides commercial banking that plays an important role in the world of finance and globalization nowadays. It provides some services such as underwriting or advisory to help company increasing funds or dealing with merger and acquisition. This part will give an overview about investment banking sector as well as its main roles in economy. Besides, this part also mentions about some risks that might happen from investment banking which need to be considered.Overview for Investment BankingExpanding of economy requires businesses and countries building more large projects and that leads to success of Investment banking industry. It's a service referring to marketing new securities to raise funds for corporations and other institutions (Hudgins, 2012). Traditionally, there was a boundary between investment banking and commercial banking. Investment banking is performed by investment bank and relates to set of activities includingUnderwriting and advisory servicesTrading and brokerageAsset management (both traditional and alternative)(Iannotta, 2010)On the other hand, commercial banking is offered by commercial bank and relates to taking deposit and retailing loans for individuals or businesses. However, in the early of 19th century, many commercial banks saw demands to find financial resources from corporations for new projects so they diversified their asset and liability activities and actively participated in sophisticated financial engineering activities (McKenzie, 2010). Banks start to acquire or form their own investment banking subsidiaries besides commercial banking such as HSBC, Citigroup or J.P Morgan Chase. They called it as Universal Banks.Role of Investment BankingTradition role of investment banking is providing underwriting service to help clients in raising funds and merger and acquisition. Besides, it also provides investing, intermediating, and risk management services to investors as well as asset management service which is responsible for managing money for individuals or corporations (Stowell, 2010)UnderwritingFirstly, one main service of investment banking is security underwriting - the purchase for new stocks, bonds, and other financial instruments in the money and capital markets on behalf of clients who need to raise new money (Hudgins, 2012). Because transactions to selling securities into the capital market are too complex and the cost is too high if clients do it by themselves, so they need to use this function of investment banking. If this sale is the first sale of common stock to general public, it's referred to as an initial public offering (IPO) (Mayo, 2005). When customers have demands to raise money for new projects, they'll contact to investment bankers (IBs). Then, process includes some main steps below.Step 1: Researching and Giving adviceIBs play as brokerage to research situation of...

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