Worldwide revenue for investment banks is about $240 billion, according to Deutsche Bank. The industry is clustered in financial hubs such as London and Hong Kong. Investment banks increasingly are engaging in deals in emerging markets such as Brazil and China.
The US investment banking industry includes about 3,000 companies with combined annual revenue of about $150 billion. High growthis forecast for the next two years. Key growth drivers include expansion into foreign and emerging markets and the creation of new product lines.
Demand is driven by economic activity that results in company mergers, acquisitions, or public financing. The profitability of an investment bank depends on its ability to accurately assess both the value of a business transaction and the readiness of the market to buy the attendant debt or equity. Big firms have an advantage because large customer transactions require firms with substantial financial resources. Small investment banks can compete by participating in syndications and operating in regional markets or specialized industries. Investment banking is highly concentrated in the US: the largest 50 firms generate more than 90 percent of industry revenue.
The global financial crisis of 2008-2009 dramatically altered the landscape of the investment banking industry. The demise of firms such as Lehman Brothers and Bear Stearns and the late 2000s recession ushered in a new era in which the creation of innovative but risky financial instruments may take a backseat to more conservative investment strategies. The new environment also means more industry oversight by the federal government, which had to step in and bail out dozens of financial services firms with billions of dollars of taxpayers' money.
The primary revenue sources of the investment banking industry are from actively trading financial instruments, providing asset management services for wealthy clients and retirement and investment funds, placing new debt and equity issues with public and private investors, and from fees associated with mergers and acquisitions (M&As). Investment banks also buy new debt and equity issues for their own accounts, acting as the market "maker," and are active securities and currency traders. About 45 percent of US industry revenue comes from brokerage and securities services; 30 percent from trading; and 25 percent from financial planning and asset management.
The industry assembles and supplies the capital required by businesses to expand, merge, and acquire other businesses. Investment banks are intermediaries between corporations issuing new debt and equity securities and investors that buy the securities. An investment bank buys new securities from the issuing company at a negotiated price and resells them to its investor base, other investment banks, and the investing public. This arrangement, called underwriting, allows the investment bank to assume the risk of the new issue for a profit on the difference between the purchase price and the offer price. The investment bank may act as the maker of the market for the new securities, facilitating trades between buyers and sellers. Investment banks perform a variety of other financial services, such as M&A advice and market analysis.
The major investment banks have research staff that performs the risk, economic, and financial analysis used to support internal operations, from acquisitions and mergers to formulating trading positions in world, US,…