Banks

Banks, organizations that carry out the business of banking, taking deposits and then using those deposits to make loans. In essence, a bank aims to make a profit by paying depositors a lower rate of interest than the rate the bank charges borrowers. In accounting terms, deposits are considered liabilities (because they have to be repaid), and loans are considered assets, though some become bad debts. Banks in most countries are supervised by a central bank, such as the Bank of England in the United Kingdom, the Bundesbank in Germany, and the Federal Reserve System in the United States.

There are many different types of bank, and the banking structure varies from one country to another. Broadly speaking, banks fall into the following categories; but, as a result of increased competition and an increase in the range of services offered by banks, the differences between categories have been blurred.

Retail banks are often referred to as commercial banks; in the United Kingdom they are widely referred to as high street banks. In addition to conventional banking services, such as the provision of chequing accounts, they deal in foreign exchange, issue credit cards, provide investment and tax advice, and sell financial products such as insurance. In most countries, there are relatively few retail banking chains, with the result that bank customers can usually find a branch of their bank wherever they are in the country. One notable exception is the United States, where, because of laws that prohibited a bank operating in more than one state, there are thousands of commercial banks. However, following a Supreme Court ruling in 1985 allowing interstate mergers approved by the states, there has been increased concentration in regional banking as a result of a spate of merger activity.

Merchant or investment banks act as intermediaries between investors and private or public concerns seeking medium- to long-term funds, often acting as underwriters for an issue of shares. Increasingly, in the late 20th and early 21st centuries, they played a fundamental role in advising on mergers and acquisitions, and on management buy-outs. For example, during the 1980s, as a result of financial deregulation (known as the Big Bang), banking in the United Kingdom saw a shift towards US-style investment banking as the big merchant banks bought up stockbrokers and stockjobbers.

Building societies were set up in the United Kingdom to take deposits in order to provide long-term loans (mortgages) to homebuyers. They are owned by their members (those who have deposited money with or borrowed money from them). In the latter decades of the 20th century they competed increasingly with retail banks: for example, by offering chequing accounts and paying interest on those accounts, and by advising on and selling a range of other financial services. As a result, retail banks entered the mortgage provision market more aggressively, and started to offer better terms to chequing account customers. Several building societies became fully fledged retail banks. The US equivalent of building societies are savings and loan associations (or thrifts), a number of which got into serious trouble in the 1980s and had to be bailed out by the government.

Savings banks, a feature of continental Europe, were set up with the aim of attracting small savers. They have become increasingly like retail banks in the services they provide.

Credit unions are where a group of people who have some link (they may all work in the same business, for example) set up the equivalent of a savings bank, which is run as a cooperative non-profit-making organization. Credit unions are widespread in the United States.

Universal banks are those that perform all the above-mentioned types of business.