What is Capital Investment Banking?

John Lister
John Lister
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Capital investment banking is an activity combining two financial concepts. Capital investment is expenditure on assets that will provide use to a business over a long-term period rather than be consumed immediately. Investment banking involves providing financial services to businesses that are seeking to raise money, as opposed to the bank loaning the money. For the most part, capital investment banking is simply another way to describe investment banking.

Capital investment is a term that can cover the same concept from two different perspectives. The wider meaning covers any spending for reasons other than covering ongoing running costs, such as wages or raw materials. Most commonly, capital investment is assumed to cover purchases of assets such as land, machinery, and buildings, but it can also cover money that is invested financially to produce a return for the business.

The narrower meaning of capital investment refers to investment by one company or financial institution in another company. It specifically refers to situations where the organization making the investment does so on the understanding the money will be used for buying capital assets to help grow the company. Most investors will prefer this type of investment, as it gives them a better chance of making a return than if the company was simply using the money to solve a cashflow problem.

Capital investment banking works in a different way to commercial and retail banking, in which the bank takes deposits from some customers and lends the cash to other customers, making its profits from the difference between the respective interest rates. With investment banking, the bank offers professional services related to investment. The most prominent of these is when a company issues securities to raise capital. The bank will usually not only take care of the administration involved, but will underwrite the issue. This means that it guarantees to buy any securities that are not taken up by investors.

There are a wide range of other activities involved in capital investment banking, usually described as making up three categories. Front office activities include the underwriting, plus using the bank's own money to buy and sell on financial markets with the aim of making a profit, and offering financial research services for clients. Middle office activities involve overseeing the financial activities of the bank as a whole, assessing strategies, and making sure that the levels of risk are acceptable. Back office activities are largely administrative, including checking the details of trades, carrying out the paperwork and maintaining the technology facilities used by the bank.

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