Type of financial services company
Investment banking is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in mergers and acquisitions (M&amp;A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services (fixed income instruments, currencies, and commodities) or research (macroeconomic, credit or equity research). Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket (upper tier), Middle Market (mid-level businesses), and boutique market (specialized businesses).
Unlike commercial banks and retail banks, investment banks do not take deposits. The revenue model of an investment bank comes mostly from the collection of fees for advising on a transaction, contrary to a commercial or retail bank. From the passage of Glass–Steagall Act in 1933 until its repeal in 1999 by the Gramm–Leach–Bliley Act, the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G7 countries, have historically not maintained such a separation. As part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd–Frank Act of 2010"), the Volcker Rule asserts some institutional separation of investment banking services from commercial banking.
All investment banking activity is classed as either "sell side" or "buy side". The "sell side" involves trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.). The "buy side" involves the provision of advice to institutions that buy investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy-side entities.
An investment bank can also be split into private and public functions with a screen separating the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas, such as stock analysis, deal with public information. An advisor who provides investment banking services in the United States must be a licensed broker-dealer and subject to U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation.
History.
Early history.
The Dutch East India Company was the first company to issue bonds and shares of stock to the general public. It was also the first publicly traded company, being the first company to be publicly listed.
Further developments.
Investment banking has changed over the years, beginning as a partnership firm focused on underwriting security issuance, i.e. initial public offerings (IPOs) and secondary market offerings, brokerage, and mergers and acquisitions, and evolving into a "full-service" range including securities research, proprietary trading, and investment management. In the 21st century, the SEC filings of the major independent investment banks such as Goldman Sachs and Morgan Stanley reflect three product segments:
In the United States, commercial banking and investment banking were separated by the Glass–Steagall Act, which was repealed in 1999. The repeal led to more "universal banks" offering an even greater range of services. Many large commercial banks have therefore developed investment banking divisions through acquisitions and hiring. Notable full-service investment banks with a significant investment banking division (IBD) include JPMorgan Chase, Bank of America, Citigroup, Deutsche Bank, UBS (Acquired Credit Suisse), and Barclays.
After the financial crisis of 2007–08 and the subsequent passage of the "Dodd-Frank Act of 2010", regulations have limited certain investment banking operations, notably with the Volcker Rule's restrictions on proprietary trading.
The traditional service of underwriting security issues has declined as a percentage of revenue. As far back as 1960, 70% of Merrill Lynch's revenue was derived from transaction commissions while "traditional investment banking" services accounted for 5%. However, Merrill Lynch was a relatively "retail-focused" firm with a large brokerage network.
Organizational structure.
Core investment banking activities.
Investment banking is split into front office, middle office, and back office activities. While large service investment banks offer all lines of business, both "sell side" and "buy side", smaller sell-side advisory firms such as boutique investment banks and small broker-dealers focus on niche segments within investment banking and sales/trading/research, respectively.
For example, Evercore (NYSE:EVR) acquired ISI International Strategy &amp; Investment (ISI) in 2014 to expand their revenue into research-driven equity sales and trading.
Investment banks offer services to both corporations issuing securities and investors buying securities. For corporations, investment bankers offer information on when and how to place their securities on the open market, a highly regulated process by the SEC to ensure transparency is provided to investors. Therefore, investment bankers play a very important role in issuing new security offerings.
Front office.
"Front office" is generally described as a revenue-generating role. There are two main areas within front office: investment banking and markets.
Corporate finance.
Corporate finance is the aspect of investment banks which involves helping customers raise funds in capital markets and giving advice on mergers and acquisitions (M&amp;A);
transactions in which capital is raised for the corporation include those listed aside.
This work may involve, i.a., subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. 
A pitch book, also called a confidential information memorandum (CIM), is a document that highlights the relevant financial information, past transaction experience, and background of the deal team to market the bank to a potential M&amp;A client; if the pitch is successful, the bank arranges the deal for the client. 
Recent legal and regulatory developments in the U.S. will likely alter the makeup of the group of arrangers and financiers willing to arrange and provide financing for certain highly leveraged transactions.
Sales and trading.
On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. 
"Sales" is the term for the investment bank's sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on a caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate bank department, which can price and execute trades, or structure new products that fit a specific need. 
Sales make deals tailored to their corporate customers' needs, that is, their terms are often specific. Focusing on their customer relationship, they may deal on the whole range of asset types. 
(In distinction, trades negotiated by market-makers usually bear standard terms; in market making, traders will buy and sell financial products with the goal of making money on each trade.
See under trading desk.)
"Structuring" has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex financial products which typically offer much greater margins and returns than underlying cash securities, so-called "yield enhancement". In 2010, investment banks came under pressure as a result of selling complex derivatives contracts to local municipalities in Europe and the US. 
"Strategists" advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products. 
Banks also undertake risk through proprietary trading, performed by a special set of traders who do not interface with clients and through "principal risk"—risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. 
Here, and in general, banks seek to maximize profitability for a given amount of risk on their balance sheet. 
Note here that the FRTB framework has underscored the distinction between the "Trading book" and the "Banking book" 
- i.e. assets intended for active trading, as opposed to assets expected to be held to maturity - 
and market risk capital requirements will differ accordingly.
The necessity for numerical ability in sales and trading has created jobs for physics, computer science, mathematics, and engineering PhDs who act as "front office" quantitative analysts.
Research.
The securities research division reviews companies and writes reports about their prospects, often with "buy", "hold", or "sell" ratings. Investment banks typically have sell-side analysts which cover various industries. Their sponsored funds or proprietary trading offices will also have buy-side research.
Research also covers credit risk, fixed income, macroeconomics, and quantitative analysis, all of which are used internally and externally to advise clients; alongside "Equity", these may be separate "groups". 
The research group(s) typically provide a key service in terms of advisory and strategy.
While the research division may or may not generate revenue (based on the specific compliance policies at different banks), its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. Research also serves outside clients with investment advice (such as institutional investors and high-net-worth individuals) in the hopes that these clients will execute suggested trade ideas through the sales and trading division of the bank, and thereby generate revenue for the firm.
With MiFID II requiring sell-side research teams in banks to charge for research, the business model for research is increasingly becoming revenue-generating. External rankings of researchers are becoming increasingly important, and banks have started the process of monetizing research publications, client interaction times, meetings with clients etc.
There is a potential conflict of interest between the investment bank and its analysis, in that published analysis can impact the performance of a security (in the secondary markets or an initial public offering) or influence the relationship between the banker and its corporate clients, and vice versa regarding material non-public information (MNPI), thereby affecting the bank's profitability.
See also .
Middle office.
This area of the bank includes treasury management, internal controls (such as Risk), and internal corporate strategy.
Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring; it is (co)responsible for the bank's funds transfer pricing (FTP) framework.
Internal control tracks and analyzes the capital flows of the firm, the finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses via dedicated trading desk product control teams. In the United States and United Kingdom, a comptroller (or financial controller) is a senior position, often reporting to the chief financial officer.
Risk management.
Risk management involves analyzing the market and credit risk that an investment bank or its clients take onto their balance sheet during transactions or trades. 
Middle office "Credit Risk" focuses around capital markets activities, such as syndicated loans, bond issuance, restructuring, and leveraged finance. 
These are not considered "front office" as they tend not to be client-facing and rather 'control' banking functions from taking too much risk. 
"Market Risk" is the control function for the Markets' business and conducts review of sales and trading activities utilizing the VaR model. 
Other Middle office "Risk Groups" include country risk, operational risk, and counterparty risks which may or may not exist on a bank to bank basis.
Front office risk teams, on the other hand, engage in revenue-generating activities involving debt structuring, restructuring, syndicated loans, and securitization for clients such as corporates, governments, and hedge funds. 
Here "Credit Risk Solutions", are a key part of capital market transactions, involving debt structuring, exit financing, loan amendment, project finance, leveraged buy-outs, and sometimes portfolio hedging. 
The "Market Risk Team" provides services to investors via derivative solutions, portfolio management, portfolio consulting, and risk advisory.
Well-known "Risk Groups" are at JPMorgan Chase, Morgan Stanley, Goldman Sachs and Barclays. 
J.P. Morgan IB Risk works with investment banking to execute transactions and advise investors, although its Finance &amp; Operation risk groups focus on middle office functions involving internal, non-revenue generating, operational risk controls. The credit default swap, for instance, is a famous credit risk hedging solution for clients invented by J.P. Morgan's Blythe Masters during the 1990s. 
The Loan Risk Solutions group within Barclays' investment banking division and Risk Management and Financing group housed in Goldman Sach's securities division are client-driven franchises.
Risk management groups such as credit risk, operational risk, internal risk control, and legal risk are