Types of Banking

The fundamental purpose of a bank is to connect those with a surplus of capital (“lenders”) with those who are experiencing a shortage of capital (“borrowers”). Banks accomplish this by accepting deposits and paying interest on those deposits, offering checking and savings accounts, and by making loans against the banks assets.

The banking industry of each country is unique, based on such factors as the historical strength of a country’s currency or the traditional relationship of its central bank to its commercial banks. Additionally, each country has its own system of banking regulations which further define the role of its central bank.

Central Bank

The Central Bank of a nation is the ultimate regulator of a country’s financial and economic policies. In capitalist economies, this regulation and control of policy is carried out via the central bank’s supply of money and credit to its member banks and with the central banks of other nations. In the US there is no central bank as such, but the Federal Reserve carries out the functions a central bank.

Investment Bank

Types of Banking

Investment Banks and investment banking are concerned with assisting large businesses in the raising of capital, in the form of stocks and bonds, for reinvestment back into that business. Many investment banks also provide investment management and brokerage services to large clients. Some investment banks also have commercial banking units or commercial banking operations.

Commercial / Merchant Bank

This type of bank handles the day to day banking activities of large and small businesses such as checking accounts, lines of credit, and capital lending. Most commercial banks also function as retail banks.

Retail Bank

Retail banks are the typical “local,” “community”, or “branch” bank. There are the type of banks that provide services such as savings and checking accounts, term deposits, consumer loans, and consumer lines of credit (”credit cards”).

Online Bank

Online banking is the newest type of banking and usually includes all the services typically offered by a retail bank, with the exception that online banks generally do not have a physical location. Most retail and commercial banks now offer at least some online banking services.

Savings and Loan or Credit Union.

Technically, even though they perform many of the same functions as banks, S&Ls or Credit Unions are not banks since the latter two institutions are generally member-owned while banks are usually owned by investors/stockholders, and are subject to different regulatory authority than found with traditional banking units.