Commercial Banking versus Investment Banking

Experienced international banker Julio M. Herrera Velutini is the chairman of an international bank based in Latin America. In his over two decades as a banking professional, Julio Herrera Velutini has been both an investment banker and a commercial banker.

There are two fundamentally different types of banks: commercial banks and investment banks. Commercial banks manage funds deposited into client accounts by individuals and businesses. They also loan out a portion of the money held in these accounts to the public. Investment banks, on the other hand, act more as facilitators, helping customers to purchase and sell bonds, stocks, and other investments, as well as raise capital. They also help companies go public through initial public offerings (IPOs).

Besides these functions, the two banking sectors also differ in terms of regulation. Commercial banks’ operations are strictly controlled. They are regulated by the Federal Reserve and also by the Federal Deposit Insurance Corporation, a federal agency which insures customer deposits. Investment banks are regulated by the Securities and Exchange Commission. However, because of the nature of the business they are engaged in and their business models, they are allowed significant operational freedom.

Historically, the two arms of banking were performed by the same institutions in-house. But during the Great Depression, Congress passed the Glass-Steagall Act in 1933 to compel banks to separate their commercial banking and investment operations. Today, however, some banks perform both activities thanks to a general repeal of Glass-Steagall in the 1990s.