Financial Markets | Commercial and Investment Bank 'Categorise' Activity

Read the introductory material and then have a go at the 'Categorise' activity on the functions of commercial and investment banks.

PRE-ACTIVITY READING

Commercial banks offer services to businesses and individuals. Commercial banking is sometimes split into two areas: retail banks provide services to individuals and small businesses; commercial banks (sometimes called wholesale banks) provide services to larger businesses.

Some examples of commercial banks include HSBC, Santander, Lloyds etc.

The main roles of commercial banks are:

• To accept savings deposits
• To lend money to households and firms
• To facilitate payments from one party to another
• To act as financial intermediaries (moving funds from savers to borrowers)

They can also provide other services like financial advice and insurance.

Investment banks provide a range of services to their customers but do not accept savings deposits.

Examples of investment banks include Goldman Sachs, JP Morgan and Morgan Stanley.

The main roles of investment banks are:

• Buying and selling securities (e.g. shares or bonds) on behalf of their customers
• Offering financial advice to customers wanting to raise money
• Helping to facilitate mergers and acquisitions
• Arrange the issuing of bonds and shares (e.g. IPOs)
• Create markets for the trading of different securities (removing the need for a stock market)

Investment banks engage in other activities, including: trading of derivatives (financial instruments that base their price off of other assets' prices); proprietary trading (trading in shares with the bank's own money).

It is possible for a bank to have both a commercial and investment banking division - large banks like Barclays do this. Regulation exists to keep these two areas separated to avoid systemic risk that might occur if investment banks were to risk consumers' savings buying risky assets.

Test your knowledge of the roles of investment and commercial banks with this 'Categorise' activity. Good luck!