The crisis caused by the pandemic is showing its first impacts on the financial sector, after the reduction of the sovereign rating for Panama to BBB-, by Fitch Ratings, caused a direct effect on some banks in the market that saw their rate risk.
In this context, it is important to remember the differences and advantages between investment banking and commercial banking; the first allows access to a custody account to invest through stock exchange instruments, while the second offers basic banking products such as checking and / or savings accounts, deposits, and loans for individuals and small businesses. Most people have a business bank account rather than an investment bank account for managing their wealth.
Here are some key aspects to see the advantages of investment banking and commercial banking:
| KEY DIFFERENCES | ||
| Commercial Banking DESIGNED TO DISTRIBUTE | Investment banking DESIGNED TO CUSTODY | |
| Business Model | > Commercial banks make money by making loans and earning interest income on the loans. > Client accounts (checking and savings) provide the money for loans. | > Investment banks act as intermediaries or advisers to institutional clients. > Their income comes from the commissions they charge for the advisory service and custody of the funds. > The money in the client’s account will never be used for bank investments. |
| Investment Management | The client is a creditor and does not control what the bank invests in. | Client funds are not part of the institution’s balance sheet. The client defines his investment strategy together with his advisor. |
| Risk management | Only the bank establishes the level of risk for investments and transfers this risk to the client. | According to his appetite for risk, the client chooses the investments that he wants to keep in his portfolio. That offers you the opportunity to diversify your exposure. The client never assumes the bank’s risk, since investments and custody are clearly separated. |
| Investment Universe | Time Deposits and Savings Accounts | Bonds, stocks, mutual funds, alternative investments, structured products, private equity, etc. |
| Reporting and Monitoring | N/A | Personalized service, follow-up and monitoring of investments, access to research, continuous reporting |
- The first and most important, your investment is not part of the balance sheet in the investment bank, in other words, your investment is in charge of acting as custodian. In commercial banking you are simply a creditor of the bank, you practically hand over the money to the bank so they can lend it.
- Another important aspect is that having access to a universe of investment instruments allows you to diversify your strategy, you will be able to find fixed income instruments with the same level of risk as a fixed term deposit, in fact, you could receive a more attractive return. Everything will depend on the risk / return balance, for this I invite you to read our article What is asset allocation, and why does it matter?
- By placing the funds in a commercial account, you guarantee your initial capital, but we expose ourselves to the risk of the bank, in addition to constituting a term deposit, we lose control of the strategy until the expiration of that contract. The liquidity of your assets is a fundamental point under the current economic situation.
- Lastly, portfolio management monitoring can occur under monthly periods or in some cases on a daily basis, depending on its composition. Each instrument will generate an information sheet (Factsheets) about the investment vehicle. When evaluating placing the funds within a bank, you must make a decision based on the qualification of a previous period but not the current one, so you will not be able to see the real situation of that institution.
When investing in one type of bank or another, we must keep in mind that their businesses are different and that they are two types of companies, the key to success is to differentiate the products and service levels; It is also important to keep in mind that for current expenses it is convenient to have an account in a commercial bank, but for wealth management the strategy must be more sophisticated through an investment bank.
At K&B we have a team that will provide personal and confidential advice for the management of your assets, always looking for the best alternative through a platform of international banks, without affiliations to avoid the additional conflict of interest of enjoying preferential rates for our clients.
