The Banking System: Commercial Banking - Operations
ByStephen D. Simpson, CFA
Retail banking is the banking that almost every reader will find most familiar. Retail banking is the business of making consumer loans, mortgages and the like, taking deposits and offering products such as checking accounts and CDs. Retail banking generally requires significant investment in branch offices, as well as other customer service points of contact, like ATMs and bank tellers.
Retail banks frequently compete on convenience, the accessibility of branches and ATMs for example, cost such as(interest rates, and account service fees, or some combination of the two. Retail banks also attempt to market multiple services to customers by encouraging customers who have a checking account to also open a savings account, borrow through its mortgage loan office, transfer retirement accounts, and so on.
Business banking is not altogether that different than consumer retail banking; operations still revolve around collecting deposits, making loans and convincing customers to use other fee-generating services.
One of the primary differences is that business customers tend to have somewhat more sophisticated demands from their banks, often leaning on banks for assistance in managing their payables, receivables and other treasury functions. Business banking also tends to be less demanding in terms of branch networks and infrastructure, but more competitive in terms of rates and fees.
There is a shrinking number of independent financial institutions that focus exclusively on private banking, as it is increasingly conducted as a department of a larger bank. Private banking is a euphemism for banking and financial services offered to wealthy customers, typically those with more than $1 million of net worth.
In addition to standard bank service offerings, like checking and savings accounts and safe deposit boxes, private banks often offer a host of trust, tax and estate planning services. Perhaps not surprisingly, the bank secrecy laws of countries like Switzerland have made them attractive locations for conducting private banking. (For more, see How Do I Open A Swiss Bank Account And What Makes Them So Special?)
Since the repeal of Glass-Steagall, the law that forced entities to separate commercial and investment banking activities after the Great Depression, many commercial banks have acquired investment banks. Investment banking is a very different business than commercial banking, but is nevertheless a major source of revenue and profits for many of the largest banks in the United States.
Investment banks specialize in underwriting securities (equity and/or debt), making markets for securities, trading for their own accounts and providing advisory services to corporate clients. Although underwriting derivatives can expose an investment bank to significant risks, as seen in the cases of Bear Stearns and Lehman Brothers, investment banking is generally a high-margin, but volatile, enterprise. (To learn more, see our case study on The Collapse Of Lehman Brothers.)
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