Key Difference: Commercial banks cater to the general public and provide services such as accepting deposits, providing loans and other basic investment products. Investment banks are financial institutions that assist individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities (or both).
The functions of banks are often undermined by the general public. To the general public, banks are places where the salary is deposited and funds are withdrawn for usage. This is limited definition of the multibillion dollar banking sector. The banking sector is divided into two broad categories: Investment Banking and Retail/Commercial Banking. Both of these banks cater to different clientele and offer different services.
Commercial banking or retail banking is the bank that most general public are aware of. These banks cater to the general public and provide services such as accepting deposits, making business loans, and offering basic investment products. In some definitions banking can further be divided into commercial banking and retail banking. Retail banking includes banks that cater specifically to individual people, while commercial banks are not limited to providing only for the individual but can also cater to corporations.
In the US, commercial banks and retails banks fall under the same category and definition as this term specifically used distinguish these banks from investment banks because of the different banking regulations. Initially, commercial banks would also provide the benefits of investment banking, but it is believed that this heavily contributed to the Great Depression of the early 20th century. Following this the government required a separation between the functions of commercial banks and investment banks through the Glass-Steagall Act, which was repealed in the 1990s.
Investment banks are financial institutions that do not accept deposits, but rather assist individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities (or both). It can also offer services such as aiding mergers and acquisitions, market making, equity securities, launch IPO services, etc. Investment banks deter from normal banking objectives and cater to a different clientele. They offer services to mostly corporations, taking care of their financial needs. Investment banking is divided into two main function groups: buy side and sell side. The sell side deals with trading securities for cash or for other securities and other such functions. The buying side provides the provision of advice to institutions concerned with buying investment services, such as hedge funds, insurance companies, etc.
Comparison between Commercial Banking and Investment Banking:
Commercial Banking | Investment Banking | |
Definition | Commercial banks cater to the general public and provide services such as accepting deposits, providing loans and other basic investment products | Investment banks are financial institutions that assist individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities (or both) |
Core Functions |
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Features | Manage deposit accounts for individuals and corporations alike. Also, provide loans from money held on deposits | Raises funds for their clients through means such as: buying and selling stocks and dealing with IPOs |
Risk Tolerance | Low | High |
Day to Day Services | Yes | No |
Loans | Yes | No |
Takes Deposits | Yes | No |
Type of Service | Standardized services for all | Bespoke service |
Examples |
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