Different Types of Banks
Banks, as you know, are financial institutions that accept deposits from citizens and pay interest in return. What most students do not think about is the entrepreneurial nature of banks. Banks are not all service institutions, most operate in order to make a profit. Even if they are a non profit they do have to make money in their operation in order to pay expenses. Banks do this in a variety of ways.
They charge interest on loans. Where do they get the money for the loans? The answer is from their depositors and from the Fed. They pay interest to depositors but charge a higher rate on money they lend out. For example, a bank may pay 3% on a savings account but charge 9.5% in interest on a loan. In the case of money borrowed from the Fed, banks pay a percentage rate on money they borrow, called the discount rate. Banks then loan that money and charge a higher rate on the loan then the rate that they paid. Its called using other peoples money!
Banks operate on fractionalized deposits. They do not keep all of the depositors money on hand. They use depositors money to make money. They do this usually by giving loans and earning interest. Usually these loans are real estate loans, sometimes they are car loans, student loans etc. Some banks make commercial real estate loans, others do not. Prior to the depression banks were allowed to invest in the stock market. A law was passed after the bank crash to end this practice and force banks and investment institutions to be different entities. Recently that law expired and has not been renewed. What does this mean? Well for certain we will see a wave of mergers. We may also see banks stepping into rather dangerous territory of investing and being connected to the stock market.
Banks charge fees. It used to be the case that checking and savings accounts were free. Today banks have fees for minimum deposit, per check fees and ATM fees. When ATM's were first introduced they were supposed to replace bank branches, save banks operating expense and that savings would be passed on to consumers. This has not happened. Instead, ATM's have become a revenue stream for banks as they charge up to $1.50 per transaction. In some cases you get hit with a double whammy. If you use the ATM of a bank other than your own both your bank as well as the ATM's bank may charge you a fee.
Commercial Bank
Specializes in helping business and making investments.
These were, until deregulation, the only banks that could make investments in commercial real estate.
Were not interested in small depositors until mid 1800's
Were the only type of banks, until deregulation, that could issue checking accounts.
These are the big banks. They are for profit institutions.
Savings Banks
Mutual Savings Bank Savings Bank
Depositor owned financial organization.
No owners or board of directors, instead there is an elected "Board of Trustees."
Non Profit institutions Many Mutual Savings Bank's eventually became Savings Banks when they decided to go public and sell stock to raise capital.
These operate to make a profit.
These banks are owned by stockholders and managed by a board of directors
The purpose of both was to have a safe place for depositors to save and earn interest.
Until deregulation, these banks were not allowed to make investments in commercial real estate.
In 1972 savings banks gained the power to issue checking accounts in New England and by 1980 nationwide. They could now really compete with the big commercial banks.
Savings and Loan Association
Financial organization that invested the majority of funds in home mortgages.
Began as cooperative clubs with members taking turn borrowing to buy homes.
In 1930's FSLIC created to insure deposits.
In the 1980's, with deregulation, many of these S&L's (or thrifts as they are also called) emerged as aggressive entrepreneurial organizations. In many cases S&L's were owned and run by individuals. The lack of regulations, as we shall see, allowed these individuals to take unwise risks and defraud their depositors and the government. This led to the Banking Crisis of the 1980's.
These are non profit institutions but were not always managed properly.
Credit Union
Owned and operated by and for their members. Like a mutual savings bank.
Usually organized by a union or employers to serve employees.
These are not technically banks and do not fall under federal banking guidelines. This allows them to act in ways that banks cannot and gives them a competitive advantage.
Historically Credit Unions would only allow members of the business or union that formed it to be a member. Today outsiders can be "sponsored in." As a result real banks have protested that credit unions should be brought under federal banking guidelines.
In the past costs were kept low because they borrowed office space, managerial help, etc. from the employer or union. This has changed as they have become more like full service banks but are not faced with some of the regulations other banks face. This gives Credit Unions an advantage that many other banks are fighting on the state and national level
Direct deposit a major feature that only Credit Unions had because of their unique relationships with the business or union. This also now exists with many other types of banks.
Non profit.
Investment Bank
Newest type of bank, really commercial banks.
Only loan money and make investments to business to buy, sell and merge. They fund IPO's and LBO's.
For profit... BIG PROFIT!!
The mutual savings bank (MSB) is one of the oldest savings institutions in the United States. It is a depositor-owned financial organization operated for the sole benefit of its depositors. But because there were no stockholders, boards of trustees were made up of businesspeople that served without pay. Later, many MSB's decided to sell stock to raise additional financial capital. These institutions became known as savings banks, because depositors did not mutually own them. Mutual savings banks got their start in the early 1800's. At that time, commercial banks catered to the needs of business and weren't interested in the accounts of small wage earners. That is when savings banks emerged to fill that need. They were popular with consumers and began to spread as westward expansion progressed. By the mid-1800's, commercial banks began to notice the savings accounts of factory workers and other wage earners. They bean to compete more heavily with the savings banks. As a result, savings banks did not spread beyond their base in the industrial northeast. However, savings banks are a powerful economic influence. In 1972 the Consumer's Savings Bank of Worcester, Massachusetts, introduced a Negotiable Order of Withdrawal (NOW) account, which is a type of checking account that pays interest. Because commercial banks had a virtual monopoly on checking accounts at the time, NOW accounts were strongly opposed. While NOW accounts were allowed to remain in New England, at the national level, commercial bankers pushed for federal legislation that temporarily prevented NOW accounts from spreading outside New England. The savings and loan (S&L's) association is another type of financial institution, which invested the majority of its funds in home mortgages. S&L's began as cooperative clubs for homebuilders in the 1800's. The association's members promised to deposit a certain sum regularly into the association. Members then took turns borrowing money to build their homes. In short, people had arrangements for funding for home building in areas where other sources of financing were not available. In the 1930's, the Federal Home Loan Bank Board was created to supervise and regulate the individual savings and loan associations. Created underneath it was the Federal Savings and Loan Insurance Corporations (FSLIC) which insured savings and loan deposits. Credit unions, which are owned and operated by and for their members, are another type of depository institution. Costs are generally low because a sponsor often provides management, help, and office facilities. Most credit unions are organized around an employer, meaning that contributions generally are deducted directly from a worker's paycheck. Recently, some credit unions began to offer checking deposits. Known as share drafts, they look like any other check or NOW account and provide members with a way to earn interest on deposits that are also available on demand. The positive aspect of credit unions is that they make low interest loans to their members beacuse they are non profit, member service organizations.
