The Bank of England just explained how investment banks make their money

The Bank of England’s latest publication answers a question that a lot of people ask: How do investment banks make money?

The article, Investment banking: linkages to the real economy and the financial system, shows what sources the money comes from and which part of the economy they serve. They look at the revenues of the 10 biggest investment banks in the world.

In total, the BoE says that those banks made about $US140 billion (£92.7 billion) in 2013: Only about 25% of that is defined as “direct service provision to the real economy”.

The rest is from services to the financial sector. In the graphic below, the section in darker orange is to the real economy, and the lighter colour means to the rest of the financial sector. Here’s the biggest part of their revenue stream:

People not directly involved in the industry might be surprised just how much bigger revenues from rates are, and how small equities revenues (trades in shares) are. Investment banks make more than four times as much from securities like government bonds than they do by directly trading shares.

That’s not all of it: The world’s 10 biggest investment banks made around $US35 billion (£23.2 billion) on underwriting and advisory services.

Here the BoE lays out how investment bank services go either to the rest of the financial sector or straight to the real economy — importantly, it shows that just because something is listed as a service for the financial sector, it doesn’t mean that the effect doesn’t reach the real economy in the end:

For reference, the 10 big investment banks that they mention are JP Morgan, Goldman Sachs, Bank of America Merrill Lynch, Citigroup, Deutsche Bank, Morgan Stanley, Credit Suisse, Barclays, BNP Paribas, Societe Generale, HSBC, Royal Bank of Scotland, UBS, Credit Agricole and Mitsubishi UFJ.

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