Difference between Investment Bank and Commercial Bank

The main difference between the Investment Bank and the Commercial Bank is that the Investment Banks are convenient to offer services to investors, and the Commercial Banks are established to conclude commercial transactions.

Investment bank vs. commercial bank

Investment banks new debt and equity securities, help with the sale of securities and drive mergers and acquisitions, reorganizations and brokerage operations, while commercial banks provide loans to individuals and small businesses and provide checking and savings accounts and certificates deposit. Investment banks are much less regulated by the Securities and Exchange Commission (SEC). The Commission offers less protection to clients and allows investment banks significantly greater operating freedom. On the other hand, commercial banks are highly regulated by federal authorities such as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC).

The comparative weakness of government regulation, in addition to the specific business model, provides investment banks with greater tolerance and exposure to risk. Commercial banks, on the other hand, have a much lower risk threshold. Commercial banks have an implicit duty to act in the best interest of their clients. Higher levels of government command over commercial banks also reduce their level of risk tolerance.

Comparative chart

An investment bank (IB) is a financial intermediary that performs a variety of services. Most investment banks specialize in large and complicated financial transactions, such as underwriting, acting as intermediaries between an issuer of securities and the investing public, facilitating alliances and other corporate reorganizations, and acting as a financial advisor or broker for institutional clients. The advisory division of an investment bank is paid a fee for its services, while the commercial division bears gains or losses based on its performance in the market. Professionals who work for investment banks may have careers as financial advisers, traders, or salespeople. A career in investment banking can be very profitable,

Investment banks are best known for their work as financial intermediaries. That is, they help companies issue new shares in a first public offering or a follow-up offering. They also help companies obtain financing by finding investors for corporate bonds. Investment bank clients include corporations, pension funds, other financial institutions, governments, and hedge funds. Size is a benefit for investment banks. The more connections the bank has in the market, the greater the chance that it will benefit from matching buyers and sellers, especially for rare transactions. Large investment banks have clients all over the world.

What is a commercial bank?

A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes different loans, and offers primary financial products such as certificates of deposit (CDs) and savings accounts for individuals and small businesses. A commercial bank is where most people do their banking, rather than an investment bank. Commercial banks make money by offering loans and earning interest income on those loans. The types of loans a commercial bank can make vary and can include mortgages, auto loans, business loans, and personal loans. Customer deposits, such as checking accounts, savings accounts, money market accounts, and certificates of deposit, they provide banks with the funds to make loans. Customers who deposit money into these accounts efficiently borrow money from the bank and pay interest. However, the interest rate the bank pays for the money they lend is less than the rate it charges for the money they lend. The interest spread determines the amount of money a commercial bank earns that pays on deposits and the interest it earns on loans, known as net interest income.

Key differences

1. A financial institution or organization created to provide investment and advisory services to companies is known as an investment bank. Commercial Bank is a bank determined to provide banking services to the general public.
2. The investment bank is associated with the performance of the stock market, while economic growth and the demand for credit influence the interest rate charged by the commercial bank.
3. The customer base of a commercial bank is comparatively higher than that of an investment bank.
4. The investment bank provides a specific service for the client, while the commercial bank offers standardized services.
5. The investment bank generates its income from fees and commissions. Unlike Commercial Bank, which earns interest and commission income.
6. The investment bank is a banker to the individual, the government, corporations, etc. On the other hand, a commercial bank is a banker for all the citizens of the country.

Final Thought

Investment banks handle securities, so their basic activity is to market financial assets and provide advisory services. While commercial banks serve all citizens of the country and their main activity is accepting deposits and granting loans.