What Is A Bank – Banks, Thrifts & Credit Unions

A bank is a financial depository institution that keeps consumers and business accounts for savings or commercial purposes and engages in the business of lending, investing, and borrowing money. Retail banking refers to banking in which banks place transactions directly with consumers, rather than corporations or other banks. Retail bank services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and related transactions. In fewer words, a bank is a financial institution where one can place and borrow money.

There are several types of banking institutions in the United States. The three main types of financial institutions are banks, thrifts and credit unions. Banks, thrifts and credit unions have different histories and traditions and were established to serve different market functions. Where you choose to place your funds should have very little to do with the name of the type of financial institution we are labeling as a bank. Deregulation that swept through the industry starting in the 1980’s has made al three of these entities very similar in their product offerings, insurance protection and the services provided. There are some differences that may ultimately lead to regional benefits but as a rule the term bank has morphed into a very generic label.

For the sake of simplicity, we use the word “bank” to refer to all of the various types of FDIC insured banking institutions and credit unions that are federally insured by the National Credit Union Administration.

More often than not, all three of these financial institutions offer basic banking services such as; checking accounts, savings accounts, time deposits (certificates of deposit) and consumer loans with some of the larger institutions offering a wider array of services such as; credit cards, mortgages, and business loans. When comparing basic bank savings and deposit features, the mid sized to large financial institutions all offer the same menu of products regardless of the structure of the company. The one slight variation to this theme is the credit union. Credit unions are organized to serve a common customer and therefore do not generally have the ability to service customers with a large network of branches in a wide geographic area.

The variety of structures and names of these financial institutions is the result of different ownership composition, different mandates on the nature of their businesses and different regulatory oversight. Since the deregulation that has swept through the finance industry in the past 20 years, the term bank has been widely used to describe all three types of financial institutions. These financial institutions have now changed there initial authorized activities to such a degree that they all engage in similar, traditional banking activities. For the sake of simplicity, the term banks will be used to describe any of the following financial depository institutions.

Commercial Banks

Commercial banks were originally set up accepts deposits from the public and lends money to businesses and consumers. The term commercial bank is frequently used to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. The opposing type of bank, using this definition, was the retail bank that catered primarily to individuals. Commercial banking activities are altogether distinctly different than those of investment banking. Investment banking includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.

Commercial banks are still the largest source of loans to small businesses. They also make consumer loans, including mortgages, and offer credit cards, deposit products and checking accounts for everyone. Now, most commercial banks offer accounts to everyone. Banks vary in size from mega banks with hundreds of branches nationwide to small community banks that specialize in serving the needs of the local clientele.

Thrifts

Thrifts is a term used to describe either savings and loans, savings banks or credit unions. Savings and loans are a form of thrift that can be either federally or state chartered and were originally established primarily to taking deposits from consumers and make residential mortgage loans. Although the activities of federal thrifts were once confined primarily to taking deposits from consumers and making residential mortgage loans, like most present day depository institutions, federal thrifts are now authorized to offer a wide range of financial products and services and have expanded to include virtually all traditional banking activities.

Mutual Savings Bank

Mutual savings banks are state chartered savings bank owned by its depositors, most often these forms of banks were established in the New England states.

The Office of Thrift Supervision is the primary regulator of all federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations.

Credit Unions

Credit unions are the most unique form of financial institution that we generically call a bank. A federal credit union is a nonprofit, cooperative financial institution owned and run by its members. You become a member of the union because your deposit is considered partial ownership in the credit union. The deposits are regarded as purchases of shares, and all earnings of the credit union are paid out as dividends to members. To maintain their preferential tax status, credit union membership requires a common bond among the members, such as belonging to the same organization or living in the same geographical area. According to the Federal Credit Union Act, anyone can apply to join a credit union if he or she shares a common bond of employer, educational institution, branch of the military or government, church or community. Over the years, the growth of the credit union movement has resulted in nearly everyone being eligible for membership through some connection. Credit unions accept deposits from their members and use them to make short-term loans. Credit unions generally emphasize consumer deposits and consumer loan services. Increasingly they are becoming full-service financial providers with product portfolios that can compete with banks.

The downside of credit unions is access. Credit unions usually have fewer branch offices. Consumers will need to meet membership requirements to take advantage of credit unions’ services regardless of the location. In recent years, there has been a push by many credit unions broadening the scope of their membership. But though credit unions must restrict their membership to receive preferential tax treatment, 1998 legislation generally broadened credit unions ability to expand their membership base, though in 2006 the legislation began to be interpreted more restrictively.

The vast majority of credit unions in the United States are federally chartered or state chartered credit unions that are federally insured. The National Credit Union Administration is the federal agency that charters and supervises federal credit unions and insures deposits in federal credit unions and state credit unions that are federally insured.

With exception of credit unions, which are organized, as not for profit organizations, banks are similar to most other businesses. Banks operate by borrowing funds usually by accepting consumer or commercial deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, as well as government entities. They then use those deposits and borrowed funds to make loans or to purchase securities. Banks make these loans to businesses, other financial institutions, and individuals. The vast majority of banking income comes from the difference on the interest they charge on loans and the interest they pay on depositors’ accounts. Banks also charge fees for services like checking, account access and maintenance as well as the loans made have their own set of fees that go along with them. Another source of income for banks is investments and securities. Interest rates provide the price signals for borrowers, lenders, and banks.

When choosing which financial institution serves you best, it is has become less of a concern as to whether it is retail bank, thrift or credit union. The choice of where your banking should be based is a more a measure of the services and products offered and how those features serve your needs. Even though there is still a differentiation between banks and thrifts, they offer many of the same services. Commercial banks can offer car loans, thrift institutions can make commercial loans, and credit unions offer mortgages. Protections through regulation and insurance have become more uniform as deregulation covered almost all facets of the banking industry.

This entry was posted on Saturday, October 11th, 2008 at 9:43 pm and is filed under Banking and CD Guide. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.