Conflict of Interest in Investment Banking
February 12, 2025
In the globalized world of today, it is common for a business to go international. Almost any company which has a sizeable turnover has to deal with suppliers and vendors from across the globe. It is true that businesses receive the benefits of such expansion. However, there are also certain costs which are associated with […]
When a firm declares bankruptcy, this decision has an impact on all the contracts signed by the firm. The law forces the firm to complete its performance in case of some contracts. On the other hand, the firm has the option to opt-out of some contracts. One such category of contracts is called employment contracts. […]
History of Prime Brokerage The growth in the number of hedge funds as well as the scale of their operations quickly created the need for a special kind of intermediary that would cater to their needs. This intermediary was the “prime broker”. The prime brokerage business quickly caught the attention of many investment banks as […]
In the previous articles, we have already read about why entrepreneurs require seed funding and how they obtain this seed funding. In most cases, the end result of seed funding is to implement a theoretical product idea on a smaller scale in the real world. There are product management techniques in place which have been […]
The primary function of investment banks is to help their clients raise equity capital. This is often done by initial public offerings. This is where investment banks provide their biggest service i.e., underwriting. Most people have a basic understanding of underwriting. They know that when an investment bank underwrites a share issue, they guarantee to […]
Investment banks perform a wide variety of activities. As we have explained in previous articles, the work performed by investment banks overlaps with the work performed by a lot of other financial institutions. Hence, they also make money in a wide variety of ways. They sell their services to large corporations and even governments.
Over the years, investment banks have been under the scanner since it is believed that they make large amounts of money and give out obscene bonuses to their top management while acting unethically. Investment banks are able to make huge sums of money since they have multiple revenue streams.
In this article, we will have a closer look at some of the revenue streams which are generated by investment banks.
Investment banks have entire departments that are dedicated to the advisory practice. Big corporations and even governments consult these banks about the best way to raise finance. They advise on which instruments can be used, which markets can be tapped, and even when the appropriate timing is to bring out a public issue.
Since the advice is provided by some of the most seasoned investment bankers, the investment banks often charge a high consulting fee, which varies with the number of hours of work that the investment banker had to put in.
Similarly, many large investment banks around the world have their own proprietary trading desks. This means that they invest their own money and not the money owned by the clients. In these cases, since they are investing their own money, they are obviously the beneficiaries of the profits that they generate from such trading. Proprietary trading banks at investment banks often look at arbitrage opportunities. They try to generate risk-free profits by using their advanced know-how while investing their money. This trading income also becomes an important source of income for these companies.
Investment banks have been making huge profits by buying assets, pooling and tranching them, and then selling them for a much higher price. However, this approach also carries some risks. For instance, during the subprime mortgage crisis of 2008, many investment banks were not able to sell the assets that they had on their books. They had held these assets temporarily only for the purpose of sale. However, due to the credit freeze, they were not able to offload the assets on time. Many investment banks came to the verge of bankruptcy because of the losses incurred as a result of these assets.
The bottom line is that investment banks have several sources of income. Hence, even if one of the sources of income dries up, it does not mean that the entire operation of the investment bank will be affected. Because of these diversified sources of income, investment banks see a stable flow of income.
Your email address will not be published. Required fields are marked *