Economics
Commercial Banks
Commercial banks are financial institutions that provide a range of services to individuals, businesses, and governments. They accept deposits, make loans, and offer various financial products such as savings accounts, checking accounts, and certificates of deposit. Commercial banks also play a crucial role in the economy by facilitating the flow of funds and providing essential financial services.
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10 Key excerpts on "Commercial Banks"
eBook - PDF- Emmanuel Roussakis(Author)
- 1997(Publication Date)
- Praeger(Publisher)
Part I Overview of the U.S. Commercial Banking System Chapter 1 Scope of Commercial Banking The U.S. financial system includes a variety of financial institutions, the oldest of which are the Commercial Banks. The first modern type of bank was chartered in 1781 at Philadelphia, and many of those established in the nineteenth century are still in operation. Perhaps because of this head start, banks have grown to be by far the most important intermediaries. Indeed, with assets in excess of $4 trillion, they constitute the largest type of U.S. financial institution. Banks per- form a variety of functions. Although lending and investing have been the ep- icenter of commercial banking, the last few years have witnessed a general surge in bank services. This surge has reflected the expansion of both the types and the volume of services that banks extend to the communities or markets served. This surge has been induced in part by government regulation, but most im- portantly by competitive pressures. This chapter describes the major functions performed by banks and reviews some salient features of bank financial state- ments. FUNCTIONS OF Commercial Banks Commercial Banks perform many functions, some central to their main role in the economy and others more peripheral. The three main functions of com- mercial banks are interrelated: the creation of money, accomplished through lending and investing activities; the holding of deposits; and the provision of a mechanism for payments and transfer of funds. They all relate to the banks’ critical role in the overall management of the flow of money and credit through the economy. Other services are offered primarily to draw customers by providing complete money management and ancillary services through a single institution. Some of 4 Commercial Banking these services, such as trust management and leasing, may themselves be prof- itable; others may be loss leaders offered solely to attract depositors to the institution.
eBook - PDFHow the City Really Works
The Definitive Guide to Money and Investing in London's Square Mile
- Alexander Davidson(Author)
- 2010(Publication Date)
- Kogan Page(Publisher)
3 Commercial banking Introduction In this chapter, we shall look at the activities of Commercial Banks, which take deposits, lend money, and participate in the money markets, foreign exchange and trade finance. We shall look briefly at building societies. We shall scrutinise how Commercial Banks raise capital, organise credit collection services, and address the issues of bad debt, capital adequacy and the Basel framework. We shall take into account implications of the recent credit crisis. Overview Banks collect money as deposits and lend money to companies. If a bank lends money, for example, toward a 25-year mortgage, the average depositor does not deposit money for so long a period, so the bank needs to find a balancing source of capital. It must keep some money with the Bank of England, and will borrow in the money markets, or longer term, through the bond markets. This is how banks have always worked, but problems arose in 2007 when the US sub-prime mortgage problems dried up the bond markets and money markets, a situation that brought Northern Rock and some other banks to the brink of collapse. In this chapter, we will look in more detail at these recent developments. We will start, however, with a history of banking. History The original purpose of banks was to stash cash. The earliest bankers operated in Florence from the 14th century, and conducted business from benches in the open air. The Italian word for bank is derived from banco , 27 28 H OW THE C ITY REALLY WORKS which means bench. If a bank was liquidated, its operation was broken up, hence the word bankrupt. In the late 14th and early 15th centuries, some Italian merchants from Lombardy came to London, and set up as money lenders in Lombard Street, the part of the City of London where banking activities are still largely concen-trated, although they have also extended to Canary Wharf.
eBook - PDFFinancial Institutions
Markets and Money
- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
COMMERCIAL BANKING C H A P T E R 1 3 Commercial Bank Operations C H A P T E R 1 4 International Banking C H A P T E R 1 5 Regulation of Financial Institutions P A R T 4 Glowimages/Getty Images C H A P T E R T H I R T E E N Commercial Bank Operations LIKE OTHER BUSINESSES, BANKS ARE profit‐maximizing firms—a fact you are probably reminded of whenever you get charged a fee or service charge. If you are at all like other depositors, you probably do not like paying fees for letting your bank use your money. Banks and other financial intermediaries are unique because their creditors are also their customers. Whenever you deposit money in your bank account, you are effectively lending money to your bank, so it is understandable that you would grumble over paying fees and ser- vice charges associated with your checking account. The purpose of this chapter is to explain bank operations. Hopefully, by the time you finish reading this chapter, you will understand why your bank charges those fees and service charges. You probably still won’t like the fees, but at least you will understand why the bank charges them. ■ Michaelpuche/Shutterstock The fundamental business of banking is to accept deposits as a source of funds and then to make loans to consumers and businesses. In the past, most transactions were face to face, with people dropping in on a weekly basis to see the banker and get free coffee and donuts. Today, customers rarely visit their bank, instead conducting most transactions over the phone, by wire, over the Internet, or at an ATM. 366 13.1 AN OVERVIEW OF THE BANKING INDUSTRY Commercial Banks are among the most important types of financial institutions because of their size and role in indirect financial markets. They are the largest category of financial institutions, with over $14 trillion in assets.
None of these services are performed by banks exclusively. For the safekeeping of valuables, and sometimes of money, there are in some places safe deposit companies to which the term "banks" is not applied. In the making of payments the post office departments of governments and express companies participate, and in the making of loans and investments brokers, loan companies, lawyers, etc., participate. The peculiarity of banking institutions consists not in the performance of any one of these services, but in the fact that they specialize in them all, or in a combination of them. Merely to keep money and valuables on deposit, or to act as paymaster, or to make loans, or to sell bonds, stocks, and mortgages would not make an institution a bank or an individual a banker; but to make a business of performing most or all of these services for the public involves the use of certain machinery and certain methods of procedure, and the assumption of a rôle in the nation's economy which is distinctive and peculiar, and which has set these institutions apart in every country as objects of legislation and of scientific treatment, as well as in the thought and regard of the people.2. The Economic Functions of Banks
Viewed from the standpoint of the nation rather than from that of individuals, the functions of banks may be described as those of intermediaries in exchanges and in the investment of capital. In the former capacity they supply the world with the major part of its medium of exchange and serve as distributing agents for that portion of the supply which comes from other sources. They create a medium of exchange through a process of bookkeeping which is world-wide in extent, and through which the mutual indebtedness of individuals, cities, and other subdivisions of countries and nations, brought about by purchases and sales on credit, are offset without the use of money.The practice of depositing surplus funds with banks for safekeeping and consequently of using them as paymasters has resulted in the reliance of everybody upon banks for currency in any form, and has thus thrown upon them the responsibility of directly utilizing all the sources of money supply. Thus while the mints of the United States and most other countries coin gold bullion, and supply subsidiary silver and copper and nickel coins to private persons on the same terms as to banks, as a matter of fact few private persons take advantage of this privilege, finding it more convenient and profitable to get the coin they want from banks. The same is true of government notes in countries in which such notes constitute a portion of the currency.
eBook - PDF- Subrata Ghatak, José R. Sánchez-Fung(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
7.2 The Commercial Banks: the creation of bank deposits ..................................................................................... The Commercial Banks in developing countries perform a variety of what are their traditional functions in developed economies. These banks accept deposits and lend to creditworthy borrowers against suitable collateral. They offer interest on the deposits. They also charge interest on loans advanced; these rates are known as the borrowing rates. The difference between the borrowing rates and the deposit rates is revenue for the banks. The demand for bank credit very much depends on the level of economic activity, the cost of credit and the rate of return on the use of bank credit. Similarly, the supply of bank credit also depends on the level of income, the confidence in the banks and the interest rates paid by the banks vis-à-vis the rates that could be earned from other types of investment. Note also that the ability to create ‘bank money’ or credit gives the banks considerable power to satisfy the demand for bank credit. However, the limit of credit creation is usually set by the rate of profit on assets held by the banks. Given the narrow size of the bill market and the limited stock of financial assets in developing countries, the Commercial Banks are likely to reach their limits sooner in the developing countries than the banks in developed ones. The other important factor that sets a limit on the capacity of the banks to create additional deposits is the unwillingness of members of the public to hold additional bank deposits. In most developing countries, it has been observed that a high proportion of ................................................................... Monetary institutions in developing countries 115 money is held in currency and a low proportion in bank deposits (Furness, 1975). Such a situation implies that the majority of loans have to be made in currency, which hinders deposit creation.
eBook - PDFCommerce
Made Simple
- Geoffrey Whitehead(Author)
- 2016(Publication Date)
- Made Simple(Publisher)
13 The Services of the Banks to Commercial Firms and Private Individuals 13.1 The Services of the Banks Today Bankers' services cover an enormous range of activities today. A full list would include: (a) Current-account services, such as: (i) transfer of moneys by the cheque system (ii) transfer of moneys by standing orders and direct debits (iii) transfer of moneys by the bank giro (credit transfer) system (iv) permission to run an overdraft (v) bank loans (vi) night-safe facilities (vii) banker's draft facilities. (viii) cash dispensers and cash points (b) Deposit-account services (c) Savings-account services (d) Other services, such as: (i) foreign exchange activities for importers and exporters (ii) acting as intermediaries in dealings with stockbrokers (iii) executorship and trustee services (iv) safe custody (v) insurance (vi) income tax advice to customers (vii) services in the export field (viii) credit ratings and credit worthiness (ix) economic information on overseas markets etc. (x) home banking services (xi) banker's credit cards (xii) discounting bills of exchange (xiii) investment management services The Services of the Banks to Commercial Firms and Private Individuals 181 13.2 Current Account Services Introduction Banks extend current account services to anyone whom they regard as reliable. A new depositor, unless recommended by his/her employer, will be asked for a reference, and if this proves satisfactory the bank will accept a deposit which will be entered in the depositor's current account. A cheque book will then be issued free of charge. Once the customer has received a cheque book he/she may use the cheques to order the banker to pay out sums of money from the current account. The name 'current account' comes from the French word courant, (running), and implies that money is being paid into and paid out of the account as often as the customer finds convenient.
eBook - PDF- S. Janssen(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
It could be conjectured that a clear legal definition of a bank and other financial terms as found in German law could impede the flexibility which appears necessary in the face of the ever faster changes in economic reality. Therefore, the much deplored absence of a clear definition of a bank in the United Kingdom and the tradition of common law (see previous remarks by the Review Committee on Banking Services Law) may have contributed significantly to the faster adaptability of the British authorities. Whichever legal system seems to better adjust to the fast changing economic reality, either tends to react to economic reality, although its reactions may in return have repercussions for that economic reality. Thus, an economic definition What Is a Bank? 15 of a bank should be applicable across borders. The next section outlines the widely accepted microeconomic definition of a bank. 2.6 Microeconomic definition of a bank The preceding sections showed that the varying banking traditions in Britain and Germany prompted different organisational structures in the banking sector. While in the United Kingdom a dual structure with clear- ing banks (DTIs) and merchant banks (NDTIs) prevailed for many years, banks in Germany have traditionally been organised as universal banks. One important issue which emerges from these different organisational forms are the capital adequacy requirements for investment banks and retail banks. The different capital requirements for different types of banks pin- point the most prominent aspect of banking business, namely dealing with risk, which is defined as the deviation from the expected, that is the vari- ance of possible outcomes (Black, 1997, pp. 406–409). Investment banks assist third parties in the management of risk. The bulk of an investment bank’s revenues comprise non-interest income, such as commission fees and trading results, which are not determined by its bal- ance sheet structure.
eBook - ePubEconomics Volume II
Modern Economic Problems
- Frank A. (Frank Albert) Fetter(Author)
- 2004(Publication Date)
- Perlego(Publisher)
§ 1. #Nature and classes of banks.# Banks perform a variety of useful functions in every modern community. All these functions touch in some way upon the use of money, and banking problems always are related to money problems. It is our purpose now to understand the general nature and work of banks in relation to the general business activity of the community. A bank, as one first comes to know it, is a building (or a room in some building) in which there is a fire- and burglar-proof safe. In this room are men receiving and paying out money and acting as bookkeepers. Gradually one comes to understand that the bank is perhaps not the building but the business organization that is there performing these transactions.In the United States there were in 1913 about 26,000 banks reported.[1] These may be classified first according to the source from which they derive their charters or authority to do a banking business as: national, state, and private. The last are unchartered and act under the general state laws governing private contracts; in general they are unsupervised.[2] Banks may be classified also according to the two main types of business they perform, as banks for savings and Commercial Banks. Most banks do mainly a general commercial business; some are distinctly banks for savings; but in truth this dividing line can be less and less sharply drawn between banks as wholes; rather the distinction must be made between the savings function and the commercial discount function, which are more and more being performed by one and the same bank. The trust company usually well exemplifies this union of functions. This will best be explained in connection with the subject to which we now turn, the analysis of the functions which banks perform.§ 2. #Functions of banks.# Almost every bank performs various functions useful to its customers, but some of which are not essentially bound up with banking, and may be performed by institutions that are not truly banks. Among these are:(a) Maintaining a safe deposit vault, where space may be rented by an individual to keep his valuable papers, jewels, etc. The customer does not usually deliver to the bank possession of the valuables, but himself retains the key to the box which the bank has no right to open. In larger cities this work is often done by separate institutions.
- Ellen Russell(Author)
- 2007(Publication Date)
- Taylor & Francis(Publisher)
We shall assume that Commercial Banks intermediate funds exclusively by accepting deposits. 2 Deposits are often (although not necessarily) attracted because Commercial Banks pay interest to depositors. 3 We shall also assume that commercial bank revenue is derived exclusively by making loans to various entities. 4 The assumption that Commercial Banks make only bank loans disallows the possibility that dividends or capital gains may be earned in commercial banking. 5 Thus at this stage in the analysis, Commercial Banks earn profit exclusively via the “spread”: the difference between the interest received on loans and the interest paid on deposits (also known as “net interest income” in banking parlance). For the time being, we shall assume that there is no deposit insurance to reimburse depositors in the event of a bank failure. Commercial Banks are leveraged, in the sense that the total amount of loans extended is far in excess of the total amount of funds on deposit. The fact that a single dollar deposited in a bank supports multiple dollars in loans enhances bank profits: the higher the leverage, the more interest income can be earned from a given amount of deposits. While this leverage enhances banks’ profits, it also makes banks vulnerable to instability. Banks suffer from a mismatch between the potentially short-term maturity of bank liabilities (deposits) and the longer-term maturity of bank assets (loans). Many deposits are payable on demand (see below), while loans are not liquidated so easily
eBook - PDF- Lawrence H. White(Author)
- 1993(Publication Date)
- NYU Press(Publisher)
6 The Diminishing Rol e of Commercia l Banking in the U.S . Econom y George G. Kaufma n Commercial bankin g an d depositor y institution s i n genera l wer e one of the grea t financial innovation s o f all times. Indeed, it woul d be almost impossible to envision the modern complex economies of highly developed countrie s without a large and strong generic bank-ing sector . Bu t recen t an d rapi d advance s i n technolog y an d out -moded public policies have, on the one hand, reduced the historical comparative advantag e o f bank s and , o n th e othe r hand , restricte d the competitiveness and endangered the safety of banks. As a result, the importanc e o f bankin g a s a n industr y i s bein g dramaticall y reduced. Althoug h th e longer-ru n implication s o f thi s erosio n o n the macroeconom y i s neutral , a s nonban k lender s provid e addi -tional credit, shorter-run implications may be less favorable to some sectors of the economy and are likely to lead to the adoption of some public policie s tha t ma y trade short-ter m improvement s fo r longer -term accelerated deterioration . I. Introductio n Modern generi c bankin g develope d a s economie s passe d throug h the commercia l an d industria l revolution s t o encourag e aggregat e savings, improve the collectio n o f savings , and mak e saving s avail -able to a wider rang e of potential borrowers. Befor e banking, saver s (lenders) an d borrower s ha d t o searc h eac h othe r ou t an d negotiat e 139 140 George G. Kaufma n terms satisfactory to both parties. This process was time consuming , cumbersome, an d inefficient . I t frequently resulte d i n the failur e t o consummate agreements . In contrast, banks were able to tailor their securities mor e closel y t o th e need s o f almos t ever y conceivabl e potential save r and borrower in terms of size, maturity, interest-rat e sensitivity, defaul t risk , currency of denomination, and prepaymen t or othe r options .
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