The banking industry

Banks, unlike other industries, they create its production by collecting deposits and absorbing risks for depositors. Then provide stable sources of investment and working capital funds for the public and other institutions.

Banks also provide many kinds of financial services among all financial intermediaries, including provide small investors insured deposits, exchange currency, an important source of funds for small borrowers who often have limited access to other sources of external finance, a smoothly functioning payments system that allows financial and real resources to flow relatively freely to their investment, a conduit for monetary policy, and a backup source of liquidity for any sector in temporary difficulty through its access to the discount window.

In addition, due to the regulation, banking industry can be separated into a few segments, such as central banks, commercial banks, merchant/investment banks, savings banks, cooperative banks, mortgage banks, Giro banks and credit union: Central banks: Typically, an economy will have a central bank, like the Federal Reserve in the US or Bank of England in the UK.

The main activities are supervision of the banking system, advising the government on monetary policy, issue of banknotes, acting as banker to the other banks, acting as banker to the government, controlling the nation’s currency reserves, acting as ‘lender of last resort’, liaison with international bodies. Commercial banks: these are banks in classic business of taking deposits and lending money. They dominate this industry. In addition, there are two further relevant terms here- retail banking and wholesale banking.

The former involves high street branches, dealing with the general public, shops and very small businesses, the latter involves low volume and high value. It covers dealings with other banks, the central bank, corporates, pension funds and other investment institutions. In addition, banks like Barclays and National Westminster are all commercial banks. Other banks like Deutsche and Union Bank of Switzerland, would say that they were ‘universal’ banks; that is, they cover all kinds of banking, including both commercial and investment banking.

In the UK, if a commercial bank carries out investment banking, it will do so through a subsidiary. However, in the US and Japan, commercial banks are prevented from doing investment banking by regulation. Merchant/Investment banks: Merchant bank is classic UK term. Investment bank is the US equivalent and perhaps the more general and modern term. The activities they include are accepting, corporate finance, securities trading, investment management, loan arrangement and foreign exchange.

Saving banks: In the modern world they are looking more and more like ordinary commercial banks due to growing mergers of previously autonomous savings banks. Another reason is deregulation, removing restrictions on their activities and giving them powers to act like commercial banks. Cooperative banks: these are banks which are owned by the members and with maximum profit not necessarily the main objective- they may aim, for example, to give low cost loans to members.

Mortgage banks: some economies have a special sector dealing with mortgages and some do not. The UK’s Building Societies is a case in point. Originally they were associations which came together to build houses and then disbanded. Gradually, they became permanent mutual organizations, collecting small high street savings and using the money to fund domestic mortgages. Giro banks: It refers to money transfers by which an individual sends a giro slip to their bank instructing them to pay a sum of money to, like the electricity or gas company.

It also has a second use which is in the term of Giro Bank and the use of post offices to help those without a bank account to pay their bills. Credit unions are another kind of depository institution. Most credit unions are formed by people with a common bond, such as those who work for the same company or belong to the same labor union or church. Members pool their savings and, when they need money, they may borrow from the credit union, often at a lower interest rate than that demanded by other financial institutions.