Question

Compare commercial banking with investing banking. Which type of banking has impacted the US economy the most in recent years?

Answer 1

Commercial banking is traditional banking services with basic service being taking deposit and loaning out. They are usually financial institutions that provide credit to consumers which may be individuals or businesses. Their assets are loans and their liabilities are deposits. Their profit comes from difference in rate charged for loans and rate paid out on deposits.

Investment banking on the other hand does not accept deposits. It rather accepts investment which it may invest in other securities such as equity shares, treasury securities, private equity ventures etc. Investment bank derives its profits from these investment. It researches the investment opportunity on the basis of financial forecasting techniques and invests when it seems that the investment will provide good returns.

Although both commercial banking and investment banking is important to the economy and both of them have a considerable role in capital formation and interest rate discovery, of late investment banking has had more impact on the economy. The investment rate of returns provide for a barometer for interest rate on risky ventures.Investment banking help capital formation in areas where risk assessment is not possible for a commercial bank. Investment banks help the economy discover rates for differeng risk profile and differening sectoral ventures. They provide capital in economy where it is sparse and hence we have seen a number of investment banks coming up in recent years