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Investment Banking Reconciliation – Types, And Stages

In the finance sector, precision and accuracy are the foremost pillars. In general, reconciliation means getting two things to be compatible. In finance, reconciliation means the process of comparing transactions and financial activity to support various documents and to check whether they are compatible or not. If the transactions are incompatible, they are restored using the reconciliation process. To know how this restoration takes place, we need to understand what is investment banking reconciliation. In this article, we will discuss in detail, what is investment banking reconciliation, why it is needed, examples, and how it works.

INVESTMENT BANKING RECONCILIATION-compressed

First, let us understand what is investment banking.

What is Investment Banking?

Investment Banking is a financial service provided by a bank division or finance company to various large institutions, companies, or government entities.  Some major services that Investment Banks provide are raising capital, underwriting new securities, assisting in the sale of securities, and merger and acquisition.

Investment banks help large organizations, corporations, and governments in making important financial decisions. Investment Bank acts as an advisor to these entities. They advise the firms regarding which stocks to purchase and sell, where to invest, which investment will be fruitful in the long run, and assist them in mergers and acquisitions.

Investment banks generally work as an intermediary between the investor and the client. They directly buy or sell shares on behalf of their client when the company has an IPO.

 

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Let Us Understand Investment Banking in Detail With an Example

For example, a Company named ABC Ltd. a tech startup thinks of expanding its business, by raising capital through an IPO (Initial Public Offering) process. The company wants to go public to raise capital funding. ABC Ltd. decided to go to an investment bank that could help them with the entire process.

The first thing that the investment bank does here is analyze the financial statements, market position, growth rate, valuation, and business model to understand the company’s financial position in the market. After analyzing the financial reports, the investment bank determines the appropriate valuation for ABC Ltd. The investment bank will underwrite the IPO. They will promise the company that is going to purchase a certain number of shares from them at a predetermined price. This provides certainty to ABC Ltd that they are financially secure. The investment bank arranges an IPO Roadshow for ABC Ltd. where all the potential investors are invited. They provide presentations, discussions, and security to the investors to generate interest in purchasing ABCs shares. Based on the investor feedback and current price valuation, the investment bank in collaboration with ABC Ltd sets the final IPO price.

They also consider the price factor that the investors are willing to pay for shares before finalizing the price. On the day of the IPO, the investment bank ensured a smooth market debut for ABC Ltd. The investment bankers who are working on this deal will manage the opening trading transactions making the newly issued shares public on the stock exchange market. The investment bank provides support and service to ABC Ltd post-IPO process in other sectors. From this example, we can see how investment bank makes complex processes easy for the client. This is just an example of one service provided by Investment Banks. They handle very complex and numerous processes making finance handling very easy for their clients.

Types of Investment Banking

Investment banks are generally classified into three categories. They are Bulge Bracket Banks. Middle-Market Banks and Boutique Banks.

Bulge Bracket Banks

As the name suggests bulge bracket banks are the largest investment banks in terms of size, number of employees, and offices. They handle the biggest clients and largest deals. Their clients are majorly big multinational companies and governments. They generally handle multibillion-dollar deals. Each bulge bracket bank has global as well as domestic presence.  These banks provide a full range of services to their clients including, financial advice, asset management, trading, equity research, merger and acquisition services, and many more.

Some well-known bulge bracket banks are: Goldman Sachs, Credit Suisse, Morgan Stanley, JP Morgan Chase, Citigroup, and Bank of America

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Middle-Market Banks:

Middle- Market banks handle deals ranging from $50 million up to $500 million or more. They occupy a middle ground between the bulge bracket banks and boutique banks. Their market presence is lower and they don’t have large clients as Bulge Bracket banks. But their presence exceeds in terms of offices, employees, and number of clients as compared to Boutique Banks. Unlike Bulge Bracket banks they provide a full range of services to their clients. Some of the middle-market banks provide service to a particular sector or industry.

Some well-known middle-market banks are Edelweiss Financial Services, JM Financial, Kotak Mahindra Capital Company and Avendus Capital

Boutique Banks:

As the name suggests boutique banks provide specialized and personalized financial services to a limited number of companies or institutions. They provide tailor-made services to their clients based on their needs and requirements. They offer services like fund-raising, bank debt, private equity management, and research, advising on acquisitions, managing IPOs, and customized financial services.

Boutique banks are further divided into two categories: Elite Boutique Banks and Regional Boutique Banks.

Elite Boutique Banks

Elite Boutique Banks are similar to Bulge Bracket Banks in terms of services offered and size of deals. They provide advice on big deals to their special clients which is why it is known as Elite Boutique Banks. Elite Boutique Banks are also known as Independent Investment Banks.

Some of the well-known elite boutique banks are Evercore, Lazard, Centerview Partners, Citigroup, Houlihan Lokey, Moelis and Greenhill

Regional Boutique Banks

Regional Boutique Banks generally have limited offices, and several employees and provide specific financial services. They handle deals that are below $50 million. As they are smaller, they couldn’t provide all the financial services to their clients like other investment banks. Regional boutique banks specialize in a single area. For example, if they specialize in the merger and acquisition area, then they will not provide advice or services for underwriting. Although, few regional banks provide more than one service to their clients.

Some of the well-known regional boutique banks are India Brook Partners, Young & Partners, Sawaya Partners, Cleantech Group, Marlin & Associates, and KLR Group.

 

What is Investment Banking Reconciliation?

Investment Banking Reconciliation means making various financial data and records compatible with each other or restoring data that is not compatible. Investment Banking is a vast field where a large number of complex transactions occur every day. Reconciliation ensures that all these transactions are aligned properly at their respective places, avoiding chaos and confusion.

For example, a big MNC Company manufacturing clothes is a client of an investment bank. They want to buy stock from another company. The investment bank has to study the financial value and profit, their client will get from this deal. Here they need to perform two roles. Firstly, they will send the purchase details to the broker. And then find out the value of the stocks and whether they are beneficial or not. The broker then confirms the same with the depository and exchange office. Here reconciliation plays an important role in matching the settlement note from the depository with the ledger of the client. They also check if the whole process is done smoothly without any financial error.

Reconciliation is an important step in investment banking that helps to solve any differences between internal and external records, or those provided by their clients or other institutions. To maintain the unification of financial data and transactions, reconciliation is important.

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Need for Investment Banking Reconciliation

Investment Banking Reconciliation ensures a smooth flow of financial statements by providing accurate reports. Here are a few of the important reasons why investment banking reconciliation is needed.

Following Reporting Standards

The government or regulatory authorities have certain reporting standards for various financial institutions and banks that are to be strictly followed. The reconciliation process helps the investment banks submit a transparent audit report to these regulatory authorities in compliance with all the rules and regulations.

Financial Reports

Financial reports are crucial for future decision-making. They are also needed to gain investors’ and authorities’ trust in the bank. Reconciliation helps to ensure that these financial reports are made with accuracy and that all the information is completely true. It helps to depict the financial position of the investment bank.

Managing Risk

Investment banks have to deal with a large number of transactions daily. If there are any error or discrepancies in recording these transactions or if any transaction is missed, it can cause financial loss for the firm. Reconciliation helps to identify these risks and tries to minimize them.

Minimizing Financial and Reputational Risk

If any error or issue is not resolved at the early stage, it will lead to financial and reputational loss. Identification of these errors at the initial stage is crucial to prevent any future discrepancies. Reconciliation helps to identify these errors enabling quick resolution. Thus, minimizing the financial and reputational risk of the bank.

Accuracy in Financial Statements

The most important factor to consider while assessing the financial statement is whether they are accurate and transparent. Large investment banks perform numerous transactions every day. These transactions are often complex and they require immediate attention. If not attended or maintained regularly they can create big chaos later on. Reconciliation helps to maintain and properly record these transactions.

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Matching Transactions

Reconciliation checks that various transactions recorded in different systems match each other. For example, the transactions recorded in the trading system should match the transactions recorded in the ledger system. This enables transparency and accuracy while preparing the final financial statement.

 

Prevention of Fraud

Any suspicious activity or transaction that should not be recorded in the system is easily detected through reconciliation. This helps to safeguard the financial integrity of the bank. In this way, reconciliation helps the investment bank detect any fraud and prevents the same for maintaining the integrity of the bank.

Operational Efficiency

The reconciliation process helps in maintaining the operational efficiency of the bank by enhancing financial transactions. Here technology and software play an important role. They assist the reconciliation team in improving the accuracy of the financial reports.

Gaining Client Confidence

The clients will trust the investment bank based on their financial reports. Institutional investors or other parties will put their trust in an investment bank by seeing the accuracy of their financial reports. Reconciliation helps to build that trust in the minds of the clients and investors by providing a commitment to financial accuracy and transparency. If the bank’s reports are accurate, the clients will be assured that their finances are in safe hands.

Audit Trail Report

The reconciliation team provides a detailed audit trail report to its internal and external auditors mentioning all the financial transactions that are matched with the internal reports, unmatched transactions, errors, or any missed transactions. This makes the work easy for the auditors to prepare the final financial report.

Thus, investment banking reconciliation plays an important role in maintaining the financial well-being of investment banks.

 

Stages of Investment Banking Reconciliation

The process of reconciliation is done to protect the investment bank from any fraud or illegal activities that will hinder the growth of the bank. There are 5 stages of investment Banking Reconciliation. These stages help to ensure that the process of reconciliation is accurate, consistent, and transparent.

In most of the investment banks, the process of reconciliation is automated and is done through software. However, it still requires humans to double-check the entries to maintain accuracy and remove any errors that the machine cannot detect. Let us see the stages of investment banking reconciliation in detail:

Checking the General Ledger With Financial Statement

The first stage in the reconciliation process is to check all the transactions and entries in the general ledger and compare them with the financial statement of the bank. Here the transactions can be related to cash entries, business deposits, withdrawals, etc.

Finding Missing Transactions in the Financial Statement, and Matching Them With the General Ledger

Sometimes, a transaction or number of transactions are missed on record in the financial statements but they are recorded in the general ledger. This can happen due to some software error or human error. Through the reconciliation process, these missing transactions can be found by comparing them with the general ledger.

Ensuring Transactions Are Recorded in Both Financial Statements as Well as Internal Register

To maintain accuracy in financial statements it is required to record each transaction twice, one in the financial statements and the other in the internal register of the bank. This helps in making the reconciliation process easier as the transactions can be verified easily.

Check for Any Errors

Sometimes there can be technical or printing errors in financial statements while recording the transaction. This can lead to major differences in the financial statements. The reconciliation team helps to identify these errors by comparing the different transaction records.

Use of Technology and Software

The main aim of the reconciliation process is to maintain accuracy and transparency in the financial statements. Various analytics tools and software help the accountant identify and detect any errors. By using this software, the reconciliation team can easily correct and modify these errors at the beginning level to avoid further discrepancies.

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Examples of Investment Banking Reconciliation

Let us understand how investment banking reconciliation works and how it helps to identify any error that occurs while recording the transactions. Here investment bank makes entries for two different transactions one is cash entries and the other is securities entries.

Cash Entries

Here the banks need to record cash transactions relating to deposits, purchase of assets, withdrawals, and interest payments

The entries for the same are as follows:

No        Type                    Amount          Date

1          Deposit             Rs10000           01-09-2023

2          Purchase           Rs50000           10-03-2023

3          Withdrawal       Rs20000           24-08-2023

4          Interest              Rs5000              04-10-2023

 

Securities Entries:

Here the bank records securities relating to the buying and selling of stocks. They purchased several stocks from Motor’s company and sold a few of their stocks to Super Mart.

The entries for the same are:

Trade ID           Company          Quantity           Price             Date

61                       Motor                    30                 Rs75         25-07-2023

62                      Super Mart          70                   Rs100       06-08-2023

 

Reconciliation Process:

The reconciliation process involves comparing the cash transactions and securities transactions with the records entered in the internal or external system of the bank.

Matched cash transactions:

No        Type                     Amount         Date

1          Deposit             Rs10000             01-09-2023

3          Withdrawal       Rs20000            24-08-2023

4          Interest              Rs5000              04-10-2023

 

Matched Securities transactions:

Trade ID     Company    Quantity        Price           Date

61               Motor           30               Rs75        25-07-2023

62           Super Mart        70              Rs100       06-08-2023

 

Identifying Missing Transactions or Unmatched Transactions:

During the reconciliation process, if any transaction is missed or any entry is done incorrectly, the reconciliation team can easily spot that transaction. This helps to get complete accurate and transparent financial reports. The system will directly show the missing entry or any wrong entry made by their team. As for the above example, the missing transactions are shown below:

Missing transactions:

No        Type                     Amount            Date

2          Purchase           Rs 50000          10-03-2023

 

Unmatched Transaction

No        Type                    Amount          Date

4          Interest                Rs 5000        04-10-2023

As we can see, the reconciliation process helps to spot the missing entries as well as marks the entries that are not matched with the internal system of the bank. This is just a small example of how investment banking reconciliation works. In real life, these transactions are in millions of rupees and are very large in numbers. So, from this, we can understand how important it is for an investment bank to do the reconciliation process.

Final Reporting:

The reconciliation team makes the entry of all the matched, unmatched, and missed transactions with their findings and the changes required. This document is considered as the audit trial report and it is shown to the internal and external auditors for final review.

Various software tools and technology are also used in the reconciliation process. They assist the reconciliation team in handling large volumes of transactions. Generally, the reconciliation process is performed regularly to ensure the accuracy of the financial reports of the investment bank.

Jobs Available in the Investment Banking Reconciliation Field

Many top investment banks offer good investment banking reconciliation job profiles. One can work as:

  • Security Operation Representative
  • Analyst- Portfolio Reconciliation
  • Senior Process Analyst
  • Associate-Reconciliation
  • Associate Level 1- EMEA EQD Reconciliation
  • Trade Lifecycle Associate
  • Financial Control- Analyst
  • Analyst- Trade Finance Operations
  • KYC Analyst

Salaries in India

Job ProfileAverage Salary
Security Operation RepresentativeINR 4.7 Lacs
Senior Process AnalystINR 4.6 Lacs
Associate-ReconciliationINR 3.1 Lacs
Trade Lifecycle AssociateINR 9.3 Lacs
Financial Control- AnalystINR 11.6 Lacs
Analyst- Trade Finance OperationsINR 5.2 Lacs
KYC AnalystINR 4.5 Lacs
Analyst- Portfolio ReconciliationINR 4.4 Lacs

Education is Required to Get a Good Job in This Field

  • Graduation degree in B com, BBA, BCA, BBA in Finance, or any diploma degree
  • Post-graduation in Finance sector, MBA in Finance, M com or PGDM
  • Any individual who has good financial knowledge and is interested in this field can opt for a career in the Investment Banking Sector
  • Basic knowledge of finance, trade life cycle, investment banking, and reconciliation is required to get a good job.

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Frequently Asked Questions

Q. Will artificial intelligence replace humans in the investment banking sector?

As it stands now, where AI can perform most tasks and jobs, the financial sector cannot be replaced by AI. Accountants still need to make decisions, interpret data, and provide sound financial advice based on their expertise.

Q. What is the major role of reconciliation in Investment Banking?

Reconciliation helps to maintain the transparency of the financial statements of banks. Through this process, the bank can attain error-free transactions and accuracy. If any of the data is missing or does not match the internal records, it can be easily spotted with the help of the reconciliation process. It helps to reduce any fraudulent activity happening in the bank.

Q. How frequently reconciliation is done by investment banks?

The reconciliation process is done depending on the complexity and volume of transactions. It can be done daily, weekly, or monthly depending on the size and nature of investment banks. Generally, it is recommended that the process should be done at least once a month.

Conclusion:

In summary, reconciliation is an important process to maintain the accuracy and transparency of financial statements. Investment bank reconciliation helps different investment banks maintain their accounts, find missing entries, reduce operational risk, and increase customer confidence.

Finance is an industry that always needs people to operate. So, the chance of AI taking their jobs is less than in other industries. Hence, it can be said that there are many career opportunities in the financial sector and all of them earn a good salary. Investment banks employ specialist reconciliation analysts to run the bank reconciliation process and the salaries are quite good. We hope that this article helps you in gaining complete knowledge regarding investment banking reconciliation.

Hi, I am Mariyam. Since childhood, I used to express my feelings through words. Content writer by day and a fiction reader at night I am rejuvenating my childhood days. Writing has always been my passion, so here I am following my passion with my side hustles.

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