How investment banks make their money
RBS chief executive Stephen Hester has finally agreed to knock back his £1m bonus. And not a moment too soon, some might say. But as my colleague Merryn Somerset Webb regularly points out, the real problem with bonuses is that investment banks are able to make the enormous profits needed to pay them out in the first place. So what do these businesses do? How do they make their super-profits? And will they continue to do so in the future? The first thing to note is that investment banks are very different to high street banks (or ‘retail’ banks). Retail banks typically take deposits from savers and lend them out to borrowers in the form of loans, mortgages and credit cards. They make most of their money by charging a higher rate of interest to borrowers than they pay to savers. Investment banks, on the other hand, make their money by selling services to customers such as companies, governments and investment funds (fund managers and hedge funds). They are usually paid for these services th…
