Main Difference

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

Investment Bank vs. Commercial Bank

Investment banks guarantee new debt and equity securities, help with selling securities, and drive mergers and acquisitions, reorganizations, and broker trades, whereas commercial banks make loans to people and small businesses and give checking and savings accounts and certificates of deposit. Investment banks much more loosely regulated by the Securities and Exchange Commission (SEC). The Commission provides less protection to customers and allows investment banks a significantly greater amount of operational freedom. On the other hand, Commercial banks highly regulated by federal authorities like the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). Commercial banks are guaranteed by the federal government to keep protection for customer accounts and provide a certain level of security.

The comparative weakness of government regulation in addition to the specific business model provides investment banks a higher tolerance of, and exposure to, risk. Commercial banks, on the other side, have a much lower risk threshold. Commercial banks have an implied duty to act in their clients’ best interests. Higher levels of government command on commercial banks also decrease their level of risk tolerance.

Comparison Chart

What is the Investment Bank?

An investment bank (IB) is a financial intermediate that performs a variety of services. Most Investment banks specialize in large and complicated financial transactions, such as underwriting, acting as an intermediary among a securities emitter and the investing public, facilitating alliances and other corporate reorganizations and serving as a broker or financial adviser for institutional clients. The advisory division of an investment bank is paid a fee for their services, while the trading division endures profit or loss based on its market performance. Professionals who work for investment banks might have careers as financial advisers, traders or salespeople. An investment banking career can be very profitable, but it typically comes after long hours and significant stress.

Investment banks are most known for their task as financial intermediaries. That is, they help corporations issuing new shares of stock in a first public offering or follow-on offering. They also help corporations get debt financing by finding investors for corporate bonds. Investment banks’ clients contain corporations, pension funds, other financial institutions, governments, and hedge funds. Size is a benefit for investment banks. The more connections the bank has across the market, the strong possibility it is to profit by matching buyers and sellers, especially for rare transactions. The large investment banks have clients around the world.

What is a Commercial Bank?

A commercial bank is a kind of financial institution that accepts deposits, offers checking account services, makes different loans, and offers primary financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. A commercial bank is where most people carry out their banking, versus an investment bank. Commercial banks make money by offer loans and earning interest income with those loans. The kinds of loans a commercial bank can give vary and may contain mortgages, auto loans, business loans, and personal loans. Customer deposits, like checking accounts, savings accounts, money market accounts, and CDs, provide banks with the funds to make loans. Customers who deposit money into these accounts efficiently borrow money to the bank and are paying interest. However, the interest rate paying by the bank on the money they borrow is less than the rate charged on the money they lend. The spread between the interest determines the amount of money earned by a commercial bank it pays on deposits and the interest it earns on loans, which is known as net interest income.

Customers find commercial bank investments, such as savings accounts and CDs, attractive because they insured by the Federal Deposit Insurance Corp. (FDIC), and money easily withdrawn. However, these investments traditionally pay very low-interest rates compared with mutual funds and other investment products. In some instances, commercial bank deposits pay no interest, such as checking account deposits.

Key Differences

Conclusion

Investment banks handle securities, and so its basic activity is to trade in financial assets and provide advisory services. Whereas commercial banks serve all the citizens of the country and its primary business is to accept deposits and grant loans.

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