Keep reading to learn the difference between corporate banking and investment banking and how each service affects the financial industry overall.
What’s the Difference Between Corporate Banking and Investment Banking?
While both corporate and investment bankers serve corporations, investment banks also often work with another type of client that might surprise you: the government. Just like corporations, government entities, including local governments and the federal government, raise capital to fund certain projects.
Services They Offer
While there are some minor differences when it comes to who corporate and investment banks serve, the more important distinction between the two comes down to the services they offer. First, corporate banking includes many ongoing financial services that companies need to maintain their financial health. Some of the services that corporate banking divisions offer include:
Loans and lines of credit: Corporate banks provide credit financing to corporations in the form of loans and revolving lines of credit. Loans can help companies finance a particular project or purpose while revolving lines of credit can provide liquidity on an ongoing basis. Treasury management: Treasury management is a broad term that encompasses many of the financial services that companies need. It can include services such as liquidity management, reporting, online banking, accounts payable and receivables management, fraud prevention, and more. These services help companies maintain their financial health and run more smoothly. Risk management: Businesses must manage their exposure to different types of risk, including interest rate risk and equity risk, with the goal of minimizing financial losses. Corporate bankers work with companies to hedge against various types of loss. Foreign exchange services: Companies that operate internationally—as many major corporations do—turn to corporate banking divisions to help them with foreign exchange services. Corporate bankers help companies to receive and transfer foreign currencies, manage payables and receivables in multiple currencies, and limit their exchange risk.
Many of the corporate banking services happen in perpetuity and require a long-term relationship between bank and client. But in the case of investment banking, the services are more transactional. Yes, an investment bank or division may have a long-term relationship with clients, but its responsibilities are often focused on a single transaction or deal. Here are some of the most common services in investment banking:
Equity financing: One of the most critical services that investment banks perform is helping corporations raise capital through equity financing. In other words, they help them raise money by selling equity (or ownership) in the company. They can do this through initial public offerings (IPOs), follow-on offerings after a company is public and private placements for companies that wish to remain private. Debt financing: Investment banks also help companies and governments raise money through debt financing. They often do this by issuing and underwriting bonds for the company. Investors purchase the bonds, essentially lending money to the company and providing capital. Investment banks not only underwrite the bonds, but help corporations to properly price them, obtain a credit rating for the bonds, and more. Mergers and acquisitions: Investment banks also help advise and guide corporations through mergers and acquisitions with other firms. They help companies to identify target companies, the value that company, perform due diligence, and close the deal. Sales and trading: Sales and trading is another major service offered by investment banks to help connect buyers and sellers of securities, create a marketplace for the assets of their clients, and provide critical research.
Corporate Banking and Investment Banking Together
Corporate and investment banking don’t exist in silos. Many financial institutions have corporate banking and investment banking divisions that work closely with one another. And in some cases, it’s even a single division that handles both financial services. Not only do many of the same financial institutions offer these services—often it’s the same clients receiving both services. For example, a large corporation may have an ongoing relationship with a corporate banking division that helps them to manage their liquidity and risk. But then suppose that same corporation decided to launch an IPO or acquire another company in the industry. In that case, they might hire the investment banking division of the very same financial institution to help them through the process.
The Bottom Line
Corporate banking and investment banking are two critical functions in the financial industry, providing services to corporations and other entities. While corporate banking divisions often form long-term relationships with companies to help them maintain their financial health, investment banking divisions guide corporations and governments through major transactions like public offerings, mergers, and acquisitions.
