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The Chinese Pension System
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Junk Bonds in Investment Banking
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Most of us when dealing with banks usually walk into the branch and get our work done we usually do not bother whether it is retail banking branch or a corporate banking branch. The difference between retail and corporate banking is that retail banking serves individuals and entities that are not corporates whereas corporate banking deals with large corporates who want to bank with that institution.
The other end of the spectrum is the investment banking, which deals with high priced and low volumes deals like arranging for mergers and acquisitions, takeovers, and other deals aimed at the top notch of the management in the corporates.
Further, it must be mentioned that whereas retail banking is volumes driven, corporate banking is a combination of volumes and size of the transactions, investment banking is purely driven by the size of the deals where volumes are usually low as the lack of it is made up by the fees earned by the investment bankers in individual deals. This means that the commissions on retail and corporate banking range from low to medium whereas for investment banking they range from high to very high.
Now that we have discussed the basic differences between the three arms of banks, we can now turn to the components of the three arms.
Retail banking involves accepting deposits and giving loans to individuals and entities who are not corporates though in many countries, it is the practice to include organizations that resemble corporates in retail banking.
The growth of corporate banking has been mainly driven by the need of the banks and the corporate sector to deal in foreign exchange transactions, to hedge their portfolios and in general, cater to the banking needs of the corporates that extend into other realms like deposits and loans of sizes that are very large.
On the other hand, investment banking caters to the equity markets, the bond markets, the deals involving mergers, acquisitions, and the portfolio management as well.
The point to be noted about the three arms of banking is that they comprise each customer segment that banks are supposed to cater to. As retail deals with individuals and organizations in some cases, corporate banking deals exclusively with the big corporates and investment banking deals with the mega deals that organizations do.
In recent years, there has been a new area that banks are targeting and this is private banking or banking for the HNIs or the High Networth Individuals. This category of banking is purely directed towards individuals, entities, and trusts that have lot of money (indeed a fortune compared to retail consumers) which are then managed by the private bankers by assuring certain rates of return and rates of return above that that are determined by the performance of the portfolio.
It needs to be mentioned that private banking sometimes encompasses all the other three arms as the presence of high Networth individuals and entities can include rich retail banking customers, corporates and trusts that need their wealth to be managed, and finally clients who are mega rich in the same way investment bankers transact mega deals.
Apart from these differences, it must be mentioned that the other aspect about banking is that it follows the simple formula of determining the difference between the rate of interest it charges on its loans and the rate of interest that it pays to depositors. This is known as spread and the difference between the three arms of banking is that the spreads are different for each arm as well as the size of the transaction, which means that the multiplication of the spread and the size of the deal is the profit that the banks earn. This explains the difference in the various arms of the deals where low volumes are made up by the huge size of the deals in investment banking and the lesser sizes of the transactions are made up by the volumes in retail banking.
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