– What do investment banks really do?
In: Economics
It is a bank that specializes in typically large scale project financing. Financing is kind of complicated for an ELI5.
A retail bank typically deals with normal checking and savings accounts, mortgages, small business loans. These are the banks with ATMs and branches etc open to the general public.
A commercial bank might deal with larger companies, handle things like international currencies, lines of credit, letters of credit, escrow services – the day to day cash/liquidity needed for medium to large businesses to operate.
Investment banks tend to handle “special” or “one off” projects usually rather large (10’s of millions to billions) involving very complex legal and regulatory issues, especially deals involving things in different countries (multi national or international deals). These banks consult with customers to provide expert advice, help do financial evaluations and analysis of projects, risk assessments, assist in crafting agreements, arrange for financing (bridge loans, etc). Even large companies seldom have staff with these kind of specialized skills since they are really only needed for big projects. This is where investment banks step in. The big investment bank also brings their reputation to the deal – so if a company engages a reputable investment bank to underwrite a project, it gives assurance to other parties that the deal is credible and the company is being serious.
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