An investment bank's revenue breaks down into three buckets. Fee-based income comes from advisory mandates (M&A, restructuring) and underwriting (ECM, DCM). It is high-margin but lumpy and procyclical: surges in good times and craters in bad. Spread / flow income comes from sales and trading market-making and prime brokerage financing. It is more stable than fees but lower-margin and balance-sheet-intensive. Asset-management and wealth-management fees are the most stable: a percentage of AUM that grows roughly with the market.
Different revenue mixes
Different banks have different revenue mixes. Goldman Sachs and Morgan Stanley historically derived 50%+ of revenue from trading and 30-40% from IBD; both have shifted aggressively toward asset and wealth management since 2010. JPMorgan's investment bank is one of four major segments alongside consumer banking, commercial banking, and asset/wealth management — meaning the parent-level revenue is dramatically more diversified. Pure boutiques like Lazard and Evercore are nearly 100% advisory.
Regulatory capital — the binding constraint
Regulatory capital is the binding constraint on every bank that has a balance sheet. Under Basel III and IV (the latter being phased in through 2030 in most jurisdictions), banks must hold capital against their risk-weighted assets. Trading and lending positions consume risk-weighted assets and therefore capital; pure advisory does not. The post-2008 regulatory tightening is a major reason Lazard and Evercore have grown profitable: they have no balance sheet, no capital constraints, and can operate at higher returns on equity than full-service rivals.
Return on equity
Return on equity is the metric senior management is judged on. Pre-2008, large investment banks routinely earned 20-30% ROE on heavy leverage. Post-Basel III, leverage came down hard and ROEs initially fell to 5-10%. By 2024, the best-run firms (JPMorgan, Morgan Stanley) were back to 14-17% ROE, but the industry-wide pre-2008 returns are gone forever. The shift toward asset and wealth management is partly a response to this: those businesses produce 25-30%+ ROEs at scale and don't consume regulatory capital.
How investment banks die
The mistakes that destroy investment banks tend to rhyme. Excessive leverage applied to bad collateral is the canonical pattern: Long-Term Capital Management in 1998 (a hedge fund, but it nearly took down its prime brokers), Bear Stearns in 2008 (overleveraged with mortgage paper), Lehman Brothers in 2008 (same pattern, larger), Credit Suisse in 2022-2023 (a long string of risk-management failures: Greensill, Archegos, the Mozambique tuna bonds, the spy-on-employees scandal, and a deposit run that finished it). Bear and Lehman fell because of mortgage exposure, but the underlying disease was always the same: too much leverage, too little capital, and a culture that failed to enforce risk discipline at the top.
What a healthy 2025 investment bank looks like
Diversified revenue (no single business above 40%), high-quality fee mix (M&A and AM/WM rising; pure trading flat or down), well-capitalised balance sheet (CET1 ratios well above the regulatory minimum), and a rigorous risk culture. The four US banks meeting all four criteria today — JPMorgan, Goldman Sachs, Morgan Stanley, and Bank of America — are why the industry has stabilised. The European banks remain in a slow restructuring out of the businesses where they cannot compete and into the ones where they still can.
Exercise
Compare two hypothetical investment-bank business mixes: Bank A — 50% S&T, 30% IBD, 15% AM, 5% prime brokerage, with 6x leverage and a CET1 ratio of 11.5%. Bank B — 25% S&T, 35% IBD, 35% AM/WM, 5% other, with 4x leverage and a CET1 ratio of 14%. Both report similar total ROE of 14%. (1) Which has the higher-quality earnings stream and why? (2) Which is more exposed to a 2022-style market shock that hurts trading? (3) Which trades at a higher P/E multiple in the public market, and roughly how much higher? (4) What strategic moves would you advise each CEO to make over the next 5 years?