Banks play a significant role in our life. The person who earns will have a bank account. The banks serve as financial institutions that would help people acquire money and keep their money safe.
Banks are of various types. Not every bank can protect and appraise a person’s assets simultaneously. For this purpose, investment banks and Custody banks were established.
Key Takeaways
- Functions: Investment involves allocating money into assets to generate returns, while custodian refers to a financial institution responsible for safeguarding and administering assets on behalf of clients.
- Roles: Investors decide to buy, sell, or hold assets, while custodians ensure the safekeeping, settlement, and reporting of these assets.
- Focus: Investment is centered on wealth creation and portfolio management, whereas custodianship emphasizes asset protection, compliance, and administration.
Investment Bank vs Custodian Bank
The difference between an investment bank and a custodian bank is that investment banks directly help in the growth of the financial status of the customers. In contrast, Custodian banks remain as the warehouse of the assets of the customers/financial institutions.
Comparison Table
| 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 advisory-based financial transactions in the company as it is associated with corporate finance.
The activities of the investment banks are classified into two forms: Sell-side and Buy-side.
Sellside – It involves trading activities on the currency or for other securities. It also involved the promotion of those securities that the investment banks. carry out
Buyside – It shows the bank’s involvement in helping customers who want to buy investment services.
Every investment bank will have considerable amounts of in-house software. The software is created by the technology team, who is responsible for the technical support system of the bank.
What is Custodian Bank?
A custodian bank, also called a custodian, is a financial institution specialized for specific responsibilities. It does not involve retail banking or even commercial banking.
- Safeguarding the assets/securities such as stocks, commodities such as gold, silver or platinum or gemstones
- It should also safeguard bonds and currency and settlement of any purchases that may be done within domestic grounds or foreign investment.
When it comes to financial instruments, here they are the derivative instruments. Derivative instruments, stocks and bonds play a significant role in the custodian.
Main Differences Between Investment Bank and Custodian Bank
- The investment banks are always responsible for the liability of the potential assets, whereas the custodians needn’t bear those losses.
- Investment banks have currencies as their financial instruments, but a custodian has a derivative financial instrument.
- https://helda.helsinki.fi/bof/bitstream/handle/123456789/11443/3_2004_FMreport.pdf?sequence=1
- https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/blj114§ion=42
Last Updated : 11 June, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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