An investment bank is a financial intermediary that performs a number of services including underwriting, acting as an intermediary between an issuer of securities and the investing public, assisting companies with mergers and other corporate reorganizations, market making and trading of equities and derivatives, and acting as a broker for institutional clients.
Investment banks were once considered solely institutional investors, bankers and financiers to high-end individuals and groups, much like Goldman Sachs. But more recently, financial giants with large retail operations like Citigroup began eating into their territory, which also meant that they shared investment-bank losses in the subprime mortgage crisis of 2008.
Throughout 2007 and into 2008, major U.S. investment banks took a hammering as the market for subprime mortgage-backed securities they had invested in heavily dissolved. In the fallout from the crisis, Bear Stearns collapsed and was taken over by JP Morgan and Merrill Lynch failed and was taken over by Bank of America.
In September 2008, financial newspapers announced "the end of an era on Wall Street" as the Federal Reserve gave permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.
Securities industry regulator the SEC and retail banking regulator the Federal Reserve agreed in mid-2008 to give the Fed greater regulatory oversight of investment banking following the credit crunch, which some blamed on poor judgement by investment banks. Federal Reserve chairman Ben Bernanke said the Fed would extend its emergency lending facility, established in the wake of the April 2008 collapse of Bear Stearns, to investment banks beyond the end of 2008. The decision helped bolster troubled Wall Street investment bank Lehman Brothers, whose demise had been predicted for months prior. This was the beginning of a substantial global reaction to the crisis, including:
- Term Asset-Backed Securities Loan Facility (TALF) (November 2008), a Federal Reserve sponsored consumer lending facility, which loaned up to $200 billion to investors to buy consumer debt.
- Troubled Asset Relief Program (TARP) (October 2008) which granted the Secretary of the U.S. Treasury up to $700 billion to buy distressed assets owned by financial institutions.
- The Dodd-Frank Act, a 2300-page package of legislation, signed into law in July 2010, that is meant to reform the financial sector after the financial crisis. The act contained several provisions affecting investment banking activities, including:
- The Financial Stability Oversight Council, which is a panel of regulators, headed by the secretary of the Treasury, that monitors systemic risks in the financial system,
- The Volcker Rule, which restricts proprietary trading by banking institutions, and
- Title VII, which aims to bring transparency and central clearing to previously unregulated OTC derivatives.
- Basel III, the third iteration of set of international supervisory standards and best practices designed to promote global harmonization of banking standards. Under Basel III, banks will be required to hold more Tier 1 capital.
- MiFID II and EMIR are rulemakings within the European Commission to promote transparency and safety in financial markets.