Question

 

Define the differences between Investment Banks and Commercial Banks. Discuss the differences in regulation and the advantages/disadvantages of each.

Answer 1

The key difference between investment banking and commercial banking is that investment banking usually deals with buying and selling corporate bonds and stocks, and even helping them file IPOs, while commercial banks are mainly concerned with corporate or individual deposits or lending. And, in practice, investment banks deal with stock markets, while commercial banks do not. However, there are also many other key variations that have to do with policy, risk level, and advantages between investment banking and commercial banking.

Another major distinction is that there is tighter control of commercial banks. Commercial banks must be supervised by many government bodies to include the Federal Deposit Insurance Corporation, or FDIC, while investment banks should to be controlled by the Securities and Exchange Commission, SEC-the latter providing for greater flexibility in decision making and investing.

Because of this regulatory disparity, commercial banks are generally less volatile than investment banks (because they are backed by the federal government)-however, on the flip side, investment banks have more space than commercial banks to make financial decisions.