There are several types of banks in the United States however after banking deregulation in the 1990’s some of the services previously prohibited to banks became available. This led to interstate banking and multi-functional banking. Nevertheless, some banks retain their distinct roles and these represent the different type of banking institutions. Furthermore, banking in the future may change as evident in this banking report entitled ‘The Future of Banking’ by the Federal Deposit Insurance Corporation (FDIC)
Banking is multi-layered, multi-faceted nexus of institutions that provide for various levels of community, local, national and international finance needs and services. Banking is a fundamental cornerstone of an economy in which money and services are entrusted. Many nations rely heavily on their banking systems to help manage their everyday personal, business, and financial management priorities. To illustrate the wide variety of banking and banking types a categorization of bank types follows:
1) Retail consumer banks
Retail banks are those banks we are most familiar with. They provide savings accounts, checking accounts, small car loans, and credit cards. Retail banks are an essential part of any banking system as they allow a secure place within which to store and grow money. Retail banks are thus important to the banking system and the economy.
2) Consumer operated banking services
Consumer banking can involve private banking such as that facilitated through Prosper.com through which private lenders and borrowers interact without the use of traditional banking means. However, the more common type of banks include local banks and Credit unions. The services provided by these banks are typically designed to meet everyday demands such as car loans, bill paying services, savings accounts, Individual Retirement Accounts, cashiers checks, money orders, electronic deposits and withdrawals and mortgages.
3) Mortgage Banks
Although many consumer banks provide mortgage servicing, an example being Bank of America some banks specialize in this business. Included in this category are Real Estate Investment Trusts (REITS), Federally Subsidized Mortgage Financiers such as Freddie Mac and Fannie Mae, Public Mortgage lenders like Countrywide Financial Inc. and online banks such as Lending TreeAll specialize in different types of loans but often distribute their loans over various types such as Sub-Prime loans, Prime Loans and Alt-A loans. Mortgage banking can also be accomplished through online banks.
4) Investment Banks
Investment banks such as Morgan Stanley primarily provide investment services such as financial planning, asset management and retirement forecasting and savings services. Although the role of banking institutions has changed with banking regulations, these banks still focus on the investment side of banking.
5) International Banks
International Banking can involve very large amounts of money. Corporations and Banks borrow money from overseas banks in large quantities if the price is right. Overnight banking, exchange rate swaps, and interest rate hedging are some of the services utilized in overseas banking. At a larger scale are banks such as the World Bank and International Monetary Fund that finance countries and large scale developmental projects.
6) Corporate Banking
Many corporations do banking of their own. They offer corporate bonds similar to Government bonds that can be only slightly more risky depending on the corporation providing them. An example of Corporate banking is State Farm Bank which provides banking services, credit cards and loans. Many corporations provide banking services in addition to their primary function to help facilitate business operations.
7) Government Banking
The United States Federal Reserve Bank plays a major role in national banking. It is the hub for all retail banks in the United States. The Federal Reserve implements banking regulation, monitors money supply, sets interest rates and manages the Government’s money. Government banking also includes mortgage banking such as loans administered by the Federal Housing Authority (FHA) and the Housing and Urban Development program (HUD). What’s more, federal and municipal governments raise funds by issuing debt instruments such as bonds and treasury bills.
In summary, the above illustrations indicate the primary tasks and functions of banks and what sectors of the economy they serve. The scope and nature of these banks is generally more complex and involved than a brief description can illustrate. Also, other types of banking do exist as banking can become highly specialized.
An example of a niche banking experiment is micro-lending, a form of banking recently implemented in India on a large scale by the 2006 Nobel peace prize winner Muhammad Yunus of Grameen bank. In this type of banking very small loans are provided to poorer individuals with flexible loan terms to assist them in generating income from their skills and resources.
Banking is an ever evolving field that requires constant oversight, legislation and design as banking needs, technology and the business environment change. Our modern day Banking system is probably the most advanced the World has ever known and is truly a marvel of human organization.
Donald R. Fraser, Benton E. Gup and James W. Kolari. ‘Commercial Banking: The Management of Risk 2nd ed’ Cincinnati, Ohio. South-Western College Publishing, 2001.