How banks work


Types of banks

Banks' activities can be divided intofocus on retail banking: payments,
retail banking, dealing directly withsavings products, credits and insurances
individuals and small businesses;for individuals or small and
business banking, providing services tomedium-sized enterprises. Apart from
mid-market business; corporate banking,this retail focus, they also differ from
directed at large business entities; andcommercial banks by their broadly
investment banking, relating todecentralised distribution network,
activities on the financial markets.providing local and regional outreach
Most banks are profit-making, privateand by their socially responsible
enterprises. However, some are owned byapproach to business and society.
government, or are non-profits.Building societies and Landesbanks:
Central banks are non-commercial bodiesconduct retail banking.
or government agencies often chargedEthical banks: banks that prioritize the
with controlling interest rates andtransparency of all operations and make
money supply across the whole economy.only social-responsible investments.
They generally provide liquidity to theTypes of investment banks
banking system and act as Lender of lastInvestment banks "underwrite" (guarantee
resort in event of a crisis.the sale of) stock and bond issues,
Types of retail bankstrade for their own accounts, make
Commercial bank: the term used for amarkets, and advise corporations on
normal bank to distinguish it from ancapital markets activities such as
investment bank. After the Greatmergers and acquisitions.
Depression, the U.S. Congress requiredMerchant banks were traditionally banks
that banks only engage in bankingwhich engaged in trade financing. The
activities, whereas investment banksmodern definition, however, refers to
were limited to capital marketbanks which provide capital to firms in
activities. Since the two no longer havethe form of shares rather than loans.
to be under separate ownership, some useUnlike Venture capital firms, they tend
the term "commercial bank" to refer to anot to invest in new companies.
bank or a division of a bank that mostlyBoth combined
deals with deposits and loans fromUniversal banks, more commonly known as
corporations or large businesses.a financial services company, engage in
Community Banks: locally operatedseveral of these activities. For
financial institutions that empowerexample, First Bank (a very large bank)
employees to make local decisions tois involved in commercial and retail
serve their customers and the partnerslending, and its subsidiaries in
Community development banks: regulatedtax-havens offer offshore banking
banks that provide financial servicesservices to customers in other
and credit to underserved markets orcountries. Other large financial
populations.institutions are similarly diversified
Postal savings banks: savings banksand engage in multiple activities. In
associated with national postal systems.Europe and Asia, big banks are very
Private banks: manage the assets of highdiversified groups that, among other
net worth individuals.services, also distribute insurance,
Offshore banks: banks located inhence the term bancassurance.
jurisdictions with low taxation andOther types of banks
regulation. Many offshore banks areIslamic Banking
essentially private banks.Islamic banks adhere to the concepts of
Savings bank: in Europe, savings banksIslamic law. Islamic banking revolves
take their roots in the 19th oraround several well established concepts
sometimes even 18th century. Theirwhich are based on Islamic canons. Since
original objective was to provide easilythe concept of interest is forbidden in
accessible savings products to allIslam, all banking activities must avoid
strata of the population. In someinterest. Instead of interest, the bank
countries, savings banks were created onearns profit (mark-up) and fees on
public initiative, while in othersfinancing facilities that it extends to
socially committed individuals createdthe customers. Also, deposit makers earn
foundations to put in place thea share of the bank’s profit as
necessary infrastructure. Nowadays,opposed to a predetermined interest
European savings banks have kept their



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