What is investment banking?

Investment banking is crucial to the UK economy. It is rooted in the country’s historic role as the dominant power in world trade. To facilitate this trade, the City of London developed markets — opportunities to buy and sell — for every tradable product. This in turn led to banks from across the globe congregating in London to participate in those markets.

Today, London is the world’s largest international banking centre — much more international in character than Wall Street in New York, the hub of the US financial system. The leading markets in foreign exchange and other globally traded financial products are in London. It has become the main European outpost of the big American investment banks. Most major European banks actually have the headquarters of their investment banking divisions in London, too.

But what exactly is investment banking? That’s not a simple question to answer. Investment banks are made up of lots of businesses: it just so happens that many of those businesses deal in the same commodity — money — and are structured along broadly similar lines.

There are no hard and fast divisions these days between investment banks and wholesale banks. However, the basic products and the key players are outlined below.

Investment banking

Investment banks have two primary roles. Firstly, they help governments and companies to raise money through the sale of shares and bonds (a form of long-term lending). Secondly, they maintain a market in those stocks and shares (collectively known as securities) by acting as brokers, enabling them to be bought and sold.

While some investment banks specialise in the first of these two roles, and others in the second, the majority combine both.

Hundreds of banks are involved in these markets. The major players include the following:

Wholesale bankings

This is the part of banking that deals in the huge amounts of money generated by all those deposit and current accounts around the world.

Some of this money is lent to governments or large companies to help fund their activities. In addition, wholesale banks also provide companies with foreign exchange trading services. So, if Rolls Royce, for instance, sells 100 jet engines abroad, the bank can convert dollars or euros into sterling in the foreign exchange markets. Financial derivatives such as currency futures can also be used to give Rolls Royce a guarantee that the value of the engines it sells will not go down due to currency fluctuations between the time the company agrees a price and the time the engines are actually supplied.

However, much of the real foreign exchange activity is between banks themselves, as they trade currency in search of a profit. Foreign exchange trading is a massive global business, with London at its centre. Trading peaks can reach $3 trillion a day — that’s the same as the yearly gross domestic product of the UK — and around a third of all that trading happens in London, with a lot more being processed here.

Wholesale banks also provide a wide range of corporate banking and trading finance services. If you wanted to sell a million tonnes of Chinese steel to the USA, for example, there is a good chance that the whole financing package, plus insurance (using Lloyds of London) and shipping services (using the Baltic Exchange) would be put together in the UK.

It's not possible to list all the banks active in these markets in London. Certainly, all those listed above as investment bankers and brokers are heavily involved. So too are all the major UK domestic banks (particularly Royal Bank of Scotland and HSBC), not to mention the 255 foreign banks that have offices in London.

So is there a role for you?

The short answer is yes. Both investment and wholesale banks recruit large numbers of school leavers and graduates. They can be tough places to get into because so many people want to work for them. But always remember that for every graduate with a PhD in maths working on the latest financial products, there are dozens and dozens of lesser mortals getting the work done!

Investment and wholesale banks have roughly the same structure. Basically, jobs break down into the following categories:

Origination

• Corporate finance/origination. This is the department in an investment bank that advises governments and companies how to raise money — see Corporate Finance. These roles usually go to people with good degrees.

And the wholesale banking equivalent . . .

• Corporate banking — this is the department that manages services for top corporate and government clients. Again, a degree is usually essential.

Trading

The trading operation of an investment or wholesale bank has roughly the same structure:

So what do the three main units in the front, middle and back offices do?

• Front office — means the brokers and traders who buy and sell shares, bonds or money (and its derivatives). This is increasingly a technical area that requires strong numerical and analytical skills. As a result, it is slowly becoming a degree-only zone in most of the larger institutions — especially with the new generation of very complex financial products and highly advanced trading strategies. However, money broking in particular can still be an area for school leavers. See Trader
• Back office — this is the part of the bank that makes sure that trades are carried out correctly, and that all the shares and the money end up in the right accounts. It is a complex area, with good long-term career opportunities, and is open to both school leavers and to people with degrees. See City Operations and Trade Support
• Middle office — despite the name, this is not some part of the bank that hovers between the front and the back office. Instead, this is a highly technical part of the bank that manages risk and keeps an eye on the markets, the economy and world news to make sure that changing circumstances don’t leave the bank with a big unexpected loss. Middle office jobs usually require degree-level education — and, increasingly, postgraduate qualifications — in a subject with a reasonable maths content. However, there are plenty of other risk-management jobs in banks that are open to both graduates and school leavers. See Credit Officer

In addition to the jobs outlined above, there are many jobs on the so-called 'buy side'. The buy side are the firms of asset managers and institutional investors who buy products from the investment banks (often called the 'sell side'). For jobs in asset management see Investment Management

Within large companies, buyers of services from wholesale banks are often professional treasurers. For more details on this related area, see the Association of Corporate Treasurers or ACT.

Finally, another popular career is that of the equity or financial analyst. Analysts advise at all levels, helping customers to create trading strategies while also advising their own traders about the value of the stocks they trade. See: Equity/Financial Analyst