Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the buying and selling of investments, while commercial banks manage deposit accounts.

Investment Banking

Investment banks are institutions that function mainly to serve businesses. They aid companies in the process of purchasing and selling bonds, stocks and a variety of other investments. Investment banks also aid companies in going public by facilitating their initial public offerings, or IPOs.

These banks are allotted higher risk tolerances, in part because of their general business model and because they are somewhat more loosely regulated by the Securities and Exchange Commission, or SEC, granting them substantial freedom in strategic decision making.

Commercial Banks

Commercial banks are responsible for managing deposit accounts, such as checking and savings accounts, for both businesses and individuals. Using money held on deposit enables them to make loans available to the public and to companies.

There is a significantly higher level of government regulation with these institutions. Commercial banks are federally insured to protect customers and are governed more stringently than investment banks by federal authorities such as the Federal Reserve and the Federal Deposit Insurance Corporation, or FDIC. Commercial banks are much more sensitive to risk due to the fact they deal directly with the public.

Combination Institutions

In 1933, the Glass-Steagall Act mandated a separation of all investment and commercial banking. It was repealed over six decades later in 1999. Since then, major banking institutions have been permitted to operate in the investment and commercial arenas. However, while there are some blended institutions, most U.S. banks have chosen to remain as either investment banks or commercial banks.

There are a number of potential benefits to combination investment/commercial banks. For example, acting as an investment bank, an institution can aid a company in selling its IPO, and then utilize commercial banking to extend credit to the new company, thereby simplifying the company's financing needs.

  1. How do investment banks help the economy?

    Learn more about the functions of investment banks in a modern economy and how investment banks have been treated differently ... Read Answer >>
  2. What are the 9 major financial institutions?

    There are nine major types of financial institutions. Understand the major types of financial institutions that exist and ... Read Answer >>
  3. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  4. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  5. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
Related Articles
  1. Personal Finance

    Investment banking versus commercial banking

    Read an in-depth review of the differences between a career in investment banking and a career in commercial banking, including how to decide between them.
  2. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  3. Investing

    Introduction To The Chinese Banking System

    As China steps into a greater role in the global economic system, their banking system continues to evolve.
  4. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
  5. Small Business

    When Wholesale Funding Goes Bad

    The wholesale funding process is extremely dependent on the credit markets. Find out why it is not always the best option for a business.
  6. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against their brick-and-mortar peers. Find out what internet banks have to offer and where they fall short.
  7. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  1. Commercial Bank

    A commercial bank is a type of financial institution that accepts ...
  2. Business Banking

    Business banking is a company's financial dealings with an institution ...
  3. Universal Banking

    Universal banking is a system in which banks provide a wide variety ...
  4. International Banking Act of 1978

    The International Banking Act of 1978 put all American bank branches ...
  5. Glass-Steagall Act

    The Glass-Steagall Act was passed by the U.S. Congress in 1933 ...
  6. Chain Banking

    Chain banking is a form of bank governance that occurs when a ...
Trading Center