Investment bankers work with corporations, governments, institutional investors and high-net individuals to raise capital and provide financial advice. Their main functions are: 1) Underwriting and 2) Mergers &Acquisitions advisory (M&A).

Companies need cash to grow and expand so they go to investment banks to borrow capital. Investment banks help sell securities (debt and equity) to investors to help raise this cash. These securities come in the form of stocks, bonds, or loans.

There are many specialized functions at an investment bank, ranging from private wealth management (brokers for the rich) to risk managers (who make sure the bank isn’t taking too much risk). However, investment banks are most commonly broken down into 3 areas:

1) Corporate Finance
2) Sales & Trading
3) Equity Research

(I will discuss each of these in a later post)

Investment banks are different from commercial banks because they provide M&A and other financial advice, whereas commercial banks do not. Roles of commercial banks include, but not limited to, accepting money deposits and lending capital. Investment and commercial banks used to be completely separate entities but now some firms have evolved into a “one stop shopping.”

There are dozens of specialized functions at an investment bank, ranging from private wealth management (essentially, brokers to the rich) to risk managers (those who make sure the bank isn’t taking on too much risk). At most major investment banks, the corporate finance and sales and trading functions are among the largest and most important.

Which Investment Bank is the Best?

It’s hard to say which investment bank is the best since they all have different rankings in different categories, such as M&A and underwriting. In 2006, Citigroup was tops in total debt and equity underwriting volume, but wasn’t as great as Goldman Sachs in M&A advisory. Goldman Sachs is excellent in equity underwriting and M&A advisory but it’s not as strong in debt issuance.

The larger investment banks with commercial banking arms, such as Citigroup and JPMorgan, dominate the debt markets. This is because they have larger balance sheets (from customer deposits, and others), so they are able to leverage their size to take on more underwriting risk.

If you want to check out the rankings of investment banks and how they perform in several categories, you should look at “league tables.” The most common ones are published quarterly by Thomson, which is an unbiased source, as opposed to getting rankings from the investment banks themselves. League tables are important because they show the firm’s expertise in a given area and are used for pitches made to clients, along with a page with tombstones (previous deals done by an I-bank) to convince clients to use their service.

Results showed that 10 of the bank holding companies need to raise an additional $74.6 billion in new capital. Of the 10, Bank of America (NYSE: BAC) needs to raise the largest amount: $33.9 billion. Wells Fargo (NYSE: WF) comes in second place. Other banks include KeyCorp (NYSE: KEY), Citigroup Inc. (NYSE: C), Fifth Third Bancorp (NYSE: FITB), Morgan Stanley (NYSE: MS), GMAC LLC (NYSE: GJM), PNC Financial Services Group Inc. (NYSE: PNC), SunTrust Banks Inc. (NYSE: STI), and Regions Financial Corp (NYSE: RF).

These banks will have 6 months to fill their capital shortfalls but they are to submit their plans to federal regulators by June to show how they will fabricate the capital needed.

Some suggestions are:

1) selling stocks - Wells Fargo plans to sell common stocks to bolster their capital base
2) selling business units- Fifth Third Bancorp sold 51% of its processing business, which handled credit card, debit and other transactions, to Advent International. This deal increased FITB’s capital levels by $1.2 billion.
3) selling securities – Each of the banks can sell government issued-bonds and other various types of securities to generate capital.
4) TARP- The Troubled Asset Relief Program still has $110 billion in cash available for investment.

Fortunately for the 9 other banks, they do not need to raise additional capital. These banks include: US Bancorp (NYSE: USB), Bank of New York Mellon Corp. (NYSE: BK), Goldman Sachs Group Inc (NYSE: GS), Capital One Financial Corp. (NYSE: COF,) JP Morgan Chase & Co. (NYSE: JPM), BB&T Corp. (NYSE: BBT), State Street Corp. (NYSE: STT), and MetLife Inc. (NYSE: MET).

With that said, if you are still not quite sure about what the stress test entails and its purpose, please feel free to read “Stressing Out” published on May 3 on this following website. It might be able to provide you pieces and probable answers to any questions that you might have.