Banks play a major role in our life. The person who earns will have a bank account. The banks serve as a financial institution that would help people to acquire money as well as to keep their money safe. The safety vault system of the bank has got the attention of more customers. Hence people started to move to the bank to keep their money safe.
Banks are of various types. Not every bank can protect and appraise a person’s assets at the same time. For this purpose, investment banks and Custody banks were established. These banks help the customers to remain relaxed because they could invest and get money from the investment banks. They are then guarded in the custodian if wanted.
Investment Bank vs Custodian Bank
The main difference between an investment bank and custodian bank is that the investment banks directly help in the growth of the financial status of the customers whereas the Custodian banks remain as the warehouse of the assets if the customers/financial institutions.
Comparison Table Between Investment Bank and Custodian Bank (in Tabular Form)
|Parameter of Comparison||Investment Bank||Custodian Bank|
|Nature of the banks||They are Advisory bodies and at times also act as marketing bodies.||They safeguard the assets of their customers.|
|Financial Growth||Through the advice from the banks there will be financial growth.||There will not be much financial growth in this custody banking.|
|Cash flow monitoring||The investment banks hold higher responsibility for this.||The custodians do not have the monitoring responsibility.|
|Transaction Management||They do not involve themselves in any form of transaction.||They involve themselves in every transaction made by the customer.|
|Financial instruments||In the investment banking system, cash acts as an instrument.||The financial instruments of the custodian are electronic and dematerialized.|
What is Investment Bank?
An investment bank is a traditional bank. It takes care of the banking of all the customers of the bank. It involves in the advisory based financial transactions in the company as it is associated with corporate finance. The investment bank does not take any form of deposits.
The activities of the investment banks are classified into two forms: Sell-side and Buy-side.
Sellside – It involves the trading activities on the currency or for other securities. It also involved the promotion of those securities that are carried out by the investment banks
Buyside – It shows the involvement of the bank in helping customers who want to buy investment services.
The investment banks help cooperates to connect with their investors. This is down through bonds and stocks. They work for two different groups: Product Groups and Industry Groups. In Product Groups the investment banks offer three services: Merger and Acquisition, Restructuring, and Leveraged Finances. When the investment banks are working in Industry Groups they act like marketing management more than being an advisory board.
Every investment bank will have considerable amounts of in-house software. The software are created by the technology team, who are responsible for technical support system of the bank. Technology has developed considerably in the last few years. So now more sales and trading are done using electronic trading. The complex algorithms are used to initiate some trades for the purpose of hedging.
What is Custodian Bank?
A custodian bank also called as custodian, is a financial institution which is specialized for certain responsibilities. It does not involve in retail banking or even in commercial banking. The financial assets of a firm and an individual are usually guarded by the custodian bank. So it is devoid of mortgages, personal accounts, branch banking, ATMs, and so forth. The roles of a custodian are:
- Safeguarding the assets/securities such as stocks, commodities such as gold, silver or platinum or gemstones
- It should also safeguard bonds and currency, settlement of any purchases that may be done within the domestic grounds or it may be a foreign purchase
- It administers the taxes withholding documents and foreign tax reclamation and corporate actions that may be voluntary and involuntary which have an impact on securities held such as stock
- It also takes care of the foreign exchange transactions
When it comes to the instruments of finance, here they are the derivative types of instruments. By derivative instruments it means that the stocks and bonds play a major role in the custodian. Since everything is documented it is very important to preserve the documents. Hence to keep them under custody, the custodian banks were established.
Main Differences Between Investment Bank and Custodian Bank
- Investment banking helps in raising the financial capital of a company. But a custodian does not help in the financial appraisal
- An investment bank does not help with safeguarding the assets. But the custodian’s primary role is to safeguard an individual’s assets
- The custodian stand on behalf of their customers during a transaction but an investment bank can’t do it
- The investment banks are always responsible for the liability of the potential assets whereas the custodians needn’t bear those losses
- The investment banks have currencies as their financial instruments but a custodian has the derivative type of financial instrument
The custodian banks have lower risks when compared to the investment banks or any other commercial banks. The growth of the custodian bank is based on the growth of the investment banks. Only when the investment is done they could have something that they should safeguard. Hence for a country to develop a strong banking system is required.
The existence of a network of bank facilitates hassle free business transactions. They make payments easier, and cheaper involving high security. When the payment is done through banks, it avoids the risk of loss or theft of money.