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 the United Kingdom, the biggest retail banks (by assets) are Barclays, National Westminster (taken over by the Royal Bank of Scotland in 2000), Midland (now part of HSBC Holdings), Abbey National (which used to be a building society), and Lloyds. 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 they have played a fundamental role in advising on mergers and acquisitions, and on management buy-outs. In the United Kingdom, some of the longest established and best-known merchant banks are still privately owned. During the 1980s, as a result of financial deregulation (known as the Big Bang), there was a shift towards US-style investment banking as the big banks bought up stockbrokers and stockjobbers. For example, Barclays bought a leading stockbroker, de Zoete & Bevan, and a leading stockjobber, Wedd Durlacher, and merged them with its own merchant bank to create Barclays de Zoete Wedd. In the United States, well-known investment banks include Merrill Lynch, Salomon Brothers, and Goldman Sachs.
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). Increasingly, they have been competing 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. One of the largest building societies, Abbey National, has become a fully-fledged retail bank; others are likely to do the same. 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. France’s biggest bank, Credit Agricole, is essentially a federation of more than 3,000 credit unions.
Universal banks are those, such as Germany’s Deutsche Bank, Dresdner Bank, and Commerzbank, which do everything that the above types of the bank do.