There are two distinct types of banks called investment banks and commercial banks which perform a set of distinct functions. Commercial banks offer a variety of deposit and lending services while investment banks offer investment management, securities trading, and securities underwriting services. There are banks that offer both types of investment banking and commercial banking services. It is important to understand the differences between the features, functions, services, etc. The article that follows offers a comprehensive explanation on the features, functions and services provided by both types of banks and explains the similarities and differences between investment bank and commercial bank.
Commercial Bank
Commercial banks offer services directly to businesses and individuals. The main services provided by a commercial bank include accepting deposits, maintaining savings and checking accounts, and providing loans to individuals and businesses for a variety of purposes. Loans are made out by using funds that are maintained at the bank as deposits. The main incomes that commercial banks receive are by making out loans to individuals and businesses. Commercial banks earn income from fees charged and interest that is charged on the principal loan amount. Commercial banks are highly regulated by a number of government authorities which include the Federal Reserve and the federal deposit insurance corporation (FDIC). This regulation is important to protect the customer’s and their funds.
Investment Bank
Investment banks offer services to large companies and corporations and also offer some investment services to smaller businesses and individuals. One of the most important services offered by investment banks include managing initial public offerings and help businesses raise funds (underwriting share issues and promoting sales of shares). They act as agents in issuing company shares. Investment banks also offer services in major business activities like mergers, acquisitions, and divestitures. They also maintain the investments of hedge funds, mutual funds, investment groups, and pension funds. Once these entities deposit their funds, the investment bank will undertake to invest those funds in profitable stocks, securities and other investment vehicles with the aim of growing the amount that is held with the bank.
What is the difference between Investment Bank and Commercial Bank?
Investment banks and commercial banks are the two main divisions in the banking industry. The main difference between the two types of banks is in relation to securities trading. Commercial banks offer a variety of services that include maintaining deposits and offering loans, but they do not deal with securities trading. On the other hand, securities trading are a main area of business for investment banks as investment banks offer IPO and underwriting services, securities trading, investment, and merger and acquisition services. The two also differ in terms of the customers that require their services. Customers of commercial banks include individuals and business customers while customers of investment banks include large corporate clients, governments, individual investors, group investors, etc.
Summary:
Investment Bank vs Commercial Bank
• There are two distinct types of banks called investment banks and commercial banks which perform a set of distinct functions.
• Commercial banks offer services directly to businesses and individuals. The main services provided by a commercial bank include accepting deposits, maintaining savings and checking accounts, and providing loans to individuals and businesses.
• Investment banks offer services to large companies and corporations and also offer some investment services to smaller businesses and individuals.
• Commercial banks do not deal with securities trading, whereas securities trading are a main area of business for investment banks.