Depending on the structural hierarchy and mandate of the banking systems, there are different forms of banking systems involved in offering banking services such as car and home loans. They include:
Central banks
Central Banks are financial institutions mandated to carry out regulation and oversight of all other banks. It has the privilege to formulate all other banks' monetary policies and regulations. For most countries in Europe, America, and other parts of the world, central banks are the only provider of coins and notes in circulation.
The purpose of the central bank is to stabilize a country's currency by controlling inflation. It is the ultimate regulator of other banks; it is therefore not regulated by any superior bank.
Functions of the central bank include:
- Issuance of money.
- lender of last resort to other commercial banks.
- Ensuring the stability of financial systems.
- Formulation of monetary policies.
- Targeting growth and unemployment.
- lender of last resort to the government.
An example of a central bank is the Federal Reserve Bank in the United States, which is tasked to conduct monetary policies, supervise and regulate other financial institutions.
Commercial banks
Commercial banks are financial institutions authorized/chartered by the states to conduct their business operations. They accept deposits, offer consumer loans, offer insurance and investment services. The general purpose of commercial banks is to provide service to the public and organizations to ensure stable and growing economies. The prime function of commercial banks is the creation of credit. Other function includes checking savings, giving personal loans, offering credit cards, and opening different business banking accounts. This bank is insured by the Federal Deposit Insurance Corporation (FDIC). Some examples of commercial banks in the United States are J.P. Morgan Chase, Bank of America, and Wells Fargo.
Investment banks
Investment banks aim at creating capital for other companies, the government, and other entities. Its acts as an intermediary in complex foreign transactions like the acquisition of mergers and preparing startups for initial public offering. The purpose of investment banks is to help cooperation, government, and other entities plan and manage their finances in large projects. They can pool funds from individuals and institutions and provide a vast security market for investors. In the USA, Investment banks are insured and regulated by the Securities and Exchange Commission. The functions of investment banks include: trading on commodities, conducting foreign transactions, handling securities, accepting deposits, facilitating mergers and acquisitions, and carrying out broker trade for both private and public institutions. Examples of investment banks in the United States are Goldman Sachs, UBS, Morgan Stanley, and Deutsche Bank.
Credit unions
Credit unions are non-profit institutions owned by members who use their financial services. They are run and managed by a board of directors. Members can access services offered by traditional banks like checking services, credit cards, savings, and loans. In the United States, these institutions with accounts holding up to $250,000 are insured by the National Credit Union Share Insurance Fund(NCUSIF).Some of the largest credit unions include; Randolph-Brooks Federal Credit Union, Alliant Credit Union, and Golden 1 Credit Union.
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There are three main types of commercial banks. They include:
Private Sector Banks
Private Sector banks are all financial institutions recognized as limited liability companies. These banks are owned by individuals or private businesses. Many private bankers offer deposit services, credit lending, tax planning services, retirement plans, insurance, and trust services.
The role of Private sector banks is to aid in opening deposit accounts with high-interest rates. Private sector banks carry out the following functions:
- Decide on the various investment strategies for clients to meet their intended goals.
- Provide advice and aim at addressing the financial circ*mstance of each client.
- Assist individual clients in protecting and maintaining their assets since each employee is assigned to a client to provide individualized financing solutions.
Public Sector Banks
Public sector banks are state-owned financial institutions under government control. Controlled by the central bank. The main role of the public sector banks is to leverage public funds to create credit that aims at sustainable growth and development for the public.
Public sector banks perform the following functions:
- Taking tax revenues and other government income deposits.
- Offer loans at lower interest rates.
- Offer account opening and saving options.
- Attract revenues from the interest which are used in the developing economy.
Foreign Banks
Foreign banks refers to banks operating outside the boundaries of a state. They open up satellite branches in other countries to provide better service to multinational consumers.
Role of foreign banks- Responsible for strengthening the economy's financial structure and setting domestic banks in a competitive environment, helping improve their efficiency.
Functions of foreign banks:
- Provide opening deposit accounts.
- Gives financial support to other local banks.
- Lend credits to financial institutions.
- Offer tax and estate planning solutions.
- Offer customer-designed investments.
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Banking refers to a financial business that involves accepting and securing finances from individuals and other entities, accepting deposits, and lending to make a profit. Banking is important in providing economic opportunities, facilitating ease of liquid cash flowage into the economy, providing payment options, and creating a financial resource for public growth and development. The different types of bank accounts include savings accounts, checking accounts(CDs), certificates of deposits, and money market accounts (MMAs). Banking systems refer to the network of institutions that offer banking services. Banking systems control the money flow into the economy and operate by earning interest from loans, investing for profits, and charging account management costs. Functions of banking systems include lending, offering checking accounts, offering car loans, offering home loans, cash deposit, the opening of depository accounts, insurance plans, retirement plans, investment plans, and other services.
Some of the types of banks include central banks like the Federal Reserve Bank of the USA, commercial banks, Credit unions, and investment banks. Commercial banks are usually chartered by the states where they are operating and are insured by the Federal Deposit Insurance Corporation(FDIC). The credit unions accounts are created and owned by members who use its services while being managed by a board of directors. Accounts holding up to $250,000 in credit unions are insured by the National Credit Union Share Insurance Fund(NCUSIF). The investment banks are regulated by the Securities and Exchange Commission and carry out functions like trading commodities, handling securities, preparing the acquisition of mergers and conducting foreign transactions. Commercial banks are financial institutions authorized by states to operate and can be categorized into public sector banks, foreign banks, and private sector banks.
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Video Transcript
What Is a Banking System?
When you sit back and think about it, banks are often a huge part of our lives. We deposit our paychecks, take out loans, and set up savings accounts, all at a bank. But what do banks do? What are the different types of banks? Let's start finding some answers to these questions by looking at the different types of banks that make up a banking system.
A banking system is a group or network of institutions that provide financial services for us. These institutions are responsible for operating a payment system, providing loans, taking deposits, and helping with investments.
Functions
Banking systems perform several different functions, depending on the network of institutions. For example, payment and loan functions at commercial banks allow us to deposit funds and use our checking accounts and debit cards to pay our bills or make purchases. They can also help us finance our cars and homes.
By comparison, central banks or systems distribute currency and establish money-related policies. Investment banks or systems conduct trades or deal with capital markets.
Many banks are profit-seeking entities with stockholders. They obtain profits by charging more interest for loans and paying less interest on deposits. For example, a bank may charge a 3.91% interest rate on a 30-year, fixed rate mortgage, but offer an interest rate of only 0.15% on a savings account of $100,000.
Types
So, now that we know what a banking system is and how it functions, let's look at four types of banking systems.
Commercial Banks
Commercial banks, such as community banks, accept deposits and offer business and consumer loans. At a commercial bank, you can open a checking or savings account, apply for a car or homeowner loan, transfer money, or pay your bills. Some commercial banks also offer insurance, investment, and retirement services. While community and commercial banks are usually chartered by the state in which they do business, some may be insured and overseen by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank.
Central and National Banks
The FDIC also insures national banks, which are investing members of the Federal Reserve System and are chartered by the United States of America. In contrast to a local commercial bank, they may have branches in major cities and the majority of states. National banks offer the same services found at a commercial bank, as well as global banking services. At a national bank, you could also open a money market account or trade bonds and stocks.
Credit Unions
Unlike commercial and national banks, credit unions are not-for-profit organizations owned by members and overseen by a board of directors. Many credit unions have membership restrictions and are only open to specific individuals and their families, such as employees of certain companies, religious institutions, or school districts; members of labor unions, or those serving in, or retired, from the military. Credit unions offer many of the same services found at commercial and national banks; accounts up to $250,000 are insured by the FDIC and the National Credit Union Share Insurance Fund (NCUSIF).
Investment Banks
Investment banks are responsible for putting your money to work at the corporate level. Some of their investing activities may include the handling of commodities, foreign transactions, and securities. Investment banks may also be involved in acquisitions and mergers or trading derivatives. Investment banks must comply with all consumer, federal, and state regulations.
Lesson Summary
Let's review! A banking system is a group or network of institutions that provide financial services. The major types of banking systems include those made up of commercial, national, and investment banks and credit unions may also be part of a banking system. The function of a banking system depends on the type of banks in its network.
The function of a commercial banking system can include accepting deposits, approving loans, offering checking and savings accounts, and providing credit and debit card services. These functions can also be found at central and national banks, which also distribute currency and establish money-related policies. Investment banks handle commodities, derivative trades, foreign transactions, and securities.
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