Investment banking: connecting banks, markets and the economy

12 August 2026

Authors: Korbinian Ibel, Michelle Galbarz, Niklas Witte and Maryam Aya El Fakir

Investment banking matters because it connects banks, capital markets and the real economy, helping firms and governments raise funding, manage risks and reach investors. It improves market efficiency and capital allocation by aiding investors to assess opportunities, price risk and fund productive investment.

Investment banking can also make it easier for banks to diversify their income under different economic and macro-financial scenarios. When interest rates are low, for instance, revenues from traditional lending decrease but banks can earn higher fees as firms may refinance debt and merger activity may increase. In uncertain and volatile markets, client trading flows may rise. In both cases, investment banking can provide fee and trading income that supplements lending income. Despite the many benefits they bring to the banking sector, these activities can also create complex risks that build up quickly in times of stress, meaning that banks must manage them well and supervisors must challenge the banks’ risk management effectively.

Investment banking is centred on two main business lines: the Investment Banking Division (IBD) helps firms pursue mergers and acquisitions or raise equity and debt, and supports governments through bond markets. The Global Markets (GM) business line provides prices and liquidity through market-making and offers derivatives that allow clients to hedge risks.

In 2025 the two business lines accounted for a material share of revenues and assets for the five EU-based banks most active in investment banking. GM was the larger activity, generating on average 17.9% of total revenue − a much higher share than the 2.3% of IBD − and representing 13.2% of risk-weighted assets. GM was also more efficient in 2025, with average cost/income ratios of 62%, below both IBD (85%) and bank level (66%). This is because IBD is a business line with a comparably high cost base, which particularly affects cost/income ratios in years of muted activity. However, with just 0.9% of risk-weighted assets, IBD is more capital efficient than GM, as its fee-driven business generates only limited risk-weighted assets. This mix matters for profitability, business model diversification and balance sheet allocation.

As mentioned in a recent blog post, banks have a clear and important role in channelling savings into productive investment. Research shows that deeper and more integrated capital markets can support this by improving market access, risk pricing and capital allocation. Investment banking contributes through underwriting, placement and market-making, helping issuers reach investors and supporting investment in firms and projects that foster innovation and growth. The size and depth of capital markets also shape the global investment banking landscape. Large, integrated markets support liquidity, client flows and fee opportunities, and help banks offer advisory, financing, trading and distribution in one place. A recent paper shows that US capital markets are larger and deeper than the EU’s, with an equity market that is several times the size, and they host many non-bank financial intermediaries, which supports liquidity, client ties, deal flow and fees.

A new ECB publication describes EU capital markets as fragmented across exchanges, legal systems and market infrastructures. Cross-border business can therefore be more complex and limit scale. Higher historical profitability also matters because it affects banks’ capacity to invest in areas such as people, technology and data. For these reasons, most product lines within global investment banking are currently dominated by large US players.^[1]

Yet there are significant real risks. As the 2007-08 financial crisis showed, market stress can spread quickly through trading books, counterparties and funding markets. Issuance and advisory revenues may fall when markets tighten. Underwriting positions can lose value. Margin calls can raise counterparty credit risk, while forced asset sales can amplify price falls. Links with non-bank financial intermediaries can add complexity.

The ECB supervises EU-based banks with material investment banking activities in an intrusive and tailored way. Supervisors frequently engage with chief risk officers, risk teams and business heads, and regularly perform deep dives to assess the robustness of areas like governance and controls, trading performance or risk appetite frameworks. This work is supported by on-site inspections and horizontal reviews, both of which focus on market, credit and counterparty credit risk, and have recently covered valuation risk, prime brokerage and links with non-bank financial intermediaries. The aim is not to discourage sound capital market activity. The EU needs strong banks and deeper markets, and investment banking can support both. But these benefits depend on prudent risk management and effective supervision. A stronger EU investment banking ecosystem needs to develop on a sound basis to support a more competitive, resilient and well-financed economy.