Commercial Banks Overview

Commercial Banks

• Commercial banks are financial institutions accepting deposits and channeling them into lending activities, either directly or indirectly through capital markets.
• They act as intermediaries connecting customers with capital deficits and those with capital surpluses.
• Key objectives for understanding commercial banks include defining their features, understanding banking regulation and regulatory agencies, recognizing bank mergers and banking privacy, distinguishing traditional and recent bank services, and recognizing present-day trends.
• Bank features include dealing in money, individual company operation, accepting deposits, providing advances, managing payments, handling agency and utility services, a focus on profit and service orientation, ever-increasing functions as a connecting medium, functioning as a bank, and maintaining a name identity.
• Regulations ensure depositor protection, maintain monetary and financial stability, create efficient and competitive systems, and safeguard consumers.
• The US regulates banking at both federal and state levels, with various charters and organizational structures subject to different regulations, unlike other countries with unified regulators. Regulatory bodies address privacy, disclosure, fraud issues, anti-money laundering, anti-terrorism, and ensure lending to lower-income demographics.
• The Federal Reserve is the US central bank, established in 1913 to respond to financial panics, especially the severe 1907 panic. Today, their responsibilities include conducting monetary policy, regulating and supervising banking institutions, and maintaining the financial system's stability.

Federal Reserve System

• The Federal Reserve (the central bank of the US) establishes and maintains monetary policy, regulates and supervises banking institutions, and manages financial system stability.

Federal Deposit Insurance Corporation (FDIC)

• The FDIC, a US government corporation established in 1933, insures deposits in member banks up to $250,000 per depositor per bank.
• Their duties include insuring deposits, examining and supervising financial organizations for strength and soundness, and handling consumer protection and bank receiverships (failed bank management).
• Since the insurance was started, no depositor has lost ensured funds due to a bank's failure, per FDIC data.

Office of the Comptroller of the Currency

• This US federal agency, established in 1963 by the National Currency Act, regulates and supervises national banks and foreign bank branches/agencies located in the US.

Office of Thrift Supervision

• Established in 1989, this US federal agency, formerly separate, was absorbed into the Office of the Comptroller of the Currency (OCC) in 2011. It regulates and supervises saving institutions (previously focused on by a separate federal agency).

Bank Mergers and Closures

• Bank mergers frequently occur for various reasons: streamlining operations, acquiring brands, or in response to unsafe and unsound practices or capital/liquidity issues, resulting in regulatory closures.
• Banks in danger of collapse may be taken over by the FDIC, managed temporarily, and then sold or merged to prevent financial collapse. The FDIC publicly tracks and reports on these situations.

Banking Privacy

• The US does not have a single law governing banking privacy and information security—regulation occurs sector-by-sector.
• The key federal privacy law for banking is the Gramm-Leach-Bliley Act (GLB), which controls the disclosure, collection and usage of banking-related non-public information.
• Federal Trade Commission (FTC) steps in to enforce federal and state banking privacy laws through penalties; criminal offences are less frequent than civil violations. The Financial Industry Regulatory Authority (FINRA) also has associated privacy rules.

Financial Service Competitors of Banks

• Banks contend with competitors including savings associations, credit unions, mutual funds, hedge funds, security brokers, investment banks, finance companies, financial holding companies, and insurance companies.

Traditional Bank Services

• Traditional bank services encompass currency exchange, discounting commercial notes, business lending, savings deposit offerings, valuable safekeeping, supporting government activities, offering checking accounts, and offering trust services.

More Recent Bank Services

• More recent offerings cover consumer loans, financial advice, cash management, equipment leasing, insurance policies, and retirement plans.

Trends Affecting Banks

• Trends affecting banking include increased service proliferation, rising competition, government deregulation, changed interest-rate sensitivities, technological advances and automation, consolidation, geographic expansion, e-banking and e-commerce, convergence, and globalization.

Types of Banks

• Community/retail banks typically have a size below $300 million, a simpler organizational structure and heavily rely on the health of the local economy, and tend to know their customers well, often offering relationship lending.
• Money center/wholesale banks often are large, multi-billion dollar companies with complex organizational structures (serving many market segments) and have geographic diversification in their services.
• Unit banks offer complete services from one location. They are generally older structures.
• Branch banks offer various services at several places, with senior management concentrated at the head office and more limited decision-making authority in local branches. Often used for expansion. May centralize or decentralize services.
• Electronic branches (internet banking, ATMs, POS) are now common and increasingly important.
• Virtual banks offer their services primarily via the web. They have cost advantages but often need time to become profitable.

Bank Structure in Specific Regions

• Europe: Banking structures vary widely across Europe, with Germany having the largest industry (often split between private and public sectors), France having a second-largest number, and specific countries having dominant larger banks or smaller banking firms (example: UK).
• Asia: Banking in China is largely dominated by the government sector, although private banks are growing, while Japan's industry is led by four large players along with many other domestic and international banks.