What Is a Bank?

A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services, such as wealth management, currency exchange, and safe deposit boxes. There are two types of banks: commercial/retail banks and investment banks. In most countries, banks are regulated by the national government or central bank.

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Bank

Understanding Banks

Commercial banks are typically concerned with managing withdrawals and receiving deposits as well as supplying short-term loans to individuals and small businesses. Consumers primarily use these banks for basic checking and savings accounts, certificates of deposit (CDs), and home mortgages. Examples of commercial banks include JPMorgan Chase & Co. and Bank of America Corp.

Investment banks focus on providing corporate clients with services such as underwriting and assisting with merger and acquisition (M&A) activity. Morgan Stanley and Goldman Sachs Group Inc. are examples of U.S. investment banks.

Central banks are chiefly responsible for currency stability, controlling inflation and monetary policy, and overseeing money supply. Some of the world's major central banks include the U.S. Federal Reserve Bank, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank and the People’s Bank of China.

While many banks are able to offer both a brick-and-mortar location and an online presence, a new breed of bank that only maintains an online presence started emerging in the early 2010s. Online-only banks often offer consumers higher interest rates and lower fees. Convenience, interest rates, and fees are the driving factors in consumers' decisions of which bank to do business with. As an alternative to banks, consumers can opt to use a credit union.

Special Considerations

U.S. banks came under intense scrutiny after the global financial crisis that occurred in 2007 and 2008. The regulatory environment for banks has since tightened considerably as a result. U.S. banks are regulated at a state or national level; depending on the structure, they may be regulated at both. State banks are regulated by a state's department of banking or department of financial institutions. This agency is generally responsible for regulating issues such as permitted practices, how much interest a bank can charge, and auditing and inspecting banks.

National banks are regulated by the Office of the Comptroller of the Currency (OCC). OCC regulations primarily cover bank capital levels, asset quality, and liquidity. Banks with Federal Deposit Insurance Corp. (FDIC) insurance are additionally regulated by the FDIC.

In response to the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 with the intention of reducing risks in the U.S. financial system. Under this act, large banks are assessed on having sufficient capital to continue operating under challenging economic conditions. This annual assessment is referred to as a stress test.

Key Takeaways

  • A bank is a financial institution licensed to receive deposits and make loans.
  • There are two types of banks: commercial/retail banks and investment banks.
  • In most countries, banks are regulated by the national government or central bank.