This is the eighth in a series of articles on the U.S. banking system. Each article will cover one type of financial institution that engages in banking. This eighth article covers investment banks and central banks. The last article covered foreign banks operating in the U.S.
When you think of banks you think of them as a holding place for your money, but there are institutions with the word bank in their names that aren’t looking for your deposits such as a central bank or an investment bank.
You’ve likely heard of both, but may not be really acquainted with what they do. Here’s a short primer on both.
Paul Scura, is an investment banker, founding and managing partner of Scura Paley and Company, an investment bank that has advised clients in financing and strategic transactions totaling more than $250 billion. He breaks down in plain English the skinny on investment banks.
Investment banks have two separate and distinct client groups, companies and governmental entities on one hand (issuer clients) and institutional and primarily wealthy individuals who provide capital (investor clients) on the other.
Investment banks help issuer clients access the capital they need from investor clients through the underwriting of security offerings and the private placement of securities. In that process of underwriting securities, the investment bank sets the terms of the securities such as the price, interest rate, maturity, among other things.
Investment banks also help companies find and help them buy other companies (acquisitions) and they also, assist companies which are looking to sell themselves – also known as merger and acquisitions services.
Although investment bankers garner a lot of attention, there are surprisingly very few real investment bankers in the United States. “If you added up all the major institutions that have investment banks and counted the number of people performing investment banking jobs, the total is not likely to exceed 10,000,” says Scura.
According to a recent CNBC report, the investment banking industry is in a bit of the doldrums due to economic uncertainty and investor caution. In fact, CNBC says the 12 largest investment banks, showed a 25% drop in revenues in the first quarter from a year ago. The survey included household names like Bank of America Merrill Lynch, Citigroup, HSBC, Goldman Sachs, Morgan Stanley, among others.
In addition to economic concerns and Nervous Nelly investors, regulatory challenges, and super low interest rates have contributed to investment banks’ woes. CNBC reports that banks are trying to streamline their businesses and are cutting jobs by the thousands.
Think of the central bank as the Grand Poobah of a country’s monetary system. In the U.S. that honor is bestowed upon the Federal Reserve. While there are other important central banks, like the European Central Bank, the Bank of England and the People’s Bank of China. For now, focus stateside.
The Federal Reserve was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. To keep it simple, think of the Fed as having responsibility in these four areas:
- conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices;
- supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers;
- maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
- providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.
You need look no further than the Federal Reserve FAQs to learn more about how it is structured.
The Federal Reserve may not take your money, but be clear it has much financial impact on your life. Brooklyn Law Professor David Reiss gives one example, “The Federal Reserve can have an impact on the interest rate you pay on your mortgage. Since the financial crisis, the Fed has fostered accommodative financial conditions which kept interest rates low. It has done this a number of ways, including through its monetary policy actions. The Federal Reserve’s Open Market Committee sets targets for the federal funds rate. The federal funds rate, in turn, influences interest rates for purchases, refinances and home equity loans.”