As important as banks are to the economy as a whole and to local communities, there is much confusion about what a bank is. Certainly banks can be identified by the functions (services or role) they perform in the economy. Banks are among the most important financial institutions in the economy. They are the principal source of creditor (school districts, cities, countries, etc). Moreover, for small local businesses ranging from grocery stores to automobiles dealers, banks are often the major source of credit to stock the shelves with merchandise or to fill a dealer’s showrooms with new cars. When business and consumers must make payments for purchases of goods and services, more often than not they use bank- provided checks, credit or debit cards, or electronic accounts connected to a computer network.
Today banking is an industry in change. Rather than being something in particular, it is continually becoming something new- offering new service, merging and consolidating into much larger and more complex business, adopting new technologies that seem to change faster than more of us can comprehend, and facing a new and changing set of rules as more and more nations cooperate to regulate and supervise the banks that serves their citizens.
Banking is also changing as a place to find a job. Traditionally, bankers hired one of the biggest shares of business, fiancé, and economics majors graduating from colleges and universes each year. However, service accuracy, friendliness, and quality of service vary from bank to bank in most market areas. Unlike many other jobs in private industry and government, banking requires technical skills and people skills, rather than just one or the other. Bankers can never stop learning because their industry is becoming something new every day, and their customers expect them to be “ ahead of the curve,” financially speaking, no matter how fast things happen to be changing.1
1See Commercial Bank, R.S.Peter, P 22, 4th para
THE ROLE OF COMMERCIAL BANK IN THE ECONOMY:
Commercial banks play an important role in facilitating economic growth. They are the main providers of credit to the households and corporate sectors and operate the payments mechanism. Commercial banks deals with both retail and corporate customers have well- diversified deposit and leading books and generally offer a full range of financial services. The largest banks in most countries are commercial banks and they include households name such as Citibank, HSBC, Deutsche Bank and Barclays. While commercial banking refers to institutions whose main business is deposit taking and leading it should always be remembered that the largest commercial banks also engage in investment banking, insurance and other financial services areas. They are also the key operator in most countries retail banking markets.2
The term bank today refers as much to the range of services traditionally offered by depository institutions as to a specific type of institutions.3
New Delivery System
- Commercial banks set up automatic teller machines (ATMs) to provide convenient banking service
- Financial institutions link ATMs into networks with shared facilities
- Commercial banks establish point-of-sale system in retail outlets
- Commercial banking provide home banking services that allow customers to pay bills, transfer funds, and reviews statements via microcomputers
- Financial institutions develops smart cards that contain a computer chip with customer’s password or identifications numbers allowing instantaneous authorization
- New York banks develop cleaning system for electronic payments retaliated to international trade, called CHIPS
- Commercial banks develop telecommunications system, designated SWIFT, which process electronic message between institutions
2See Introduction To Banking, C.Barbara. G. Claudia. M.Philip, p35, 2nd para
3See Bank Management, K.W.Timothy. Macdonald.Scott, p41, 5th para
- Banks contract with nonbank vendors such as IBN and EDS to handle item(check) processing
- Bank use image processing for storing and reading financial documents
- Banks merge back office item processing operations
- Banks use mobile and “Supermarket” branches
- Offer financial planning and investment services in branch with joint venture partners
- Market banks services through screen telephones
- Telephone bill payment
- Automated payment; e.g.” pay at the pump “
- Home banking services, including internet banking
- Introduce internet only banks
- Point-of-sale check truncation
- Smart cards, electronic money, and digital payment system
- Consumer financial account aggregation
- Electronic bill presentment
- Financial account aggregation
MANY DIFFERENT ROLE BANK PLAY FOR LOCAL MARKET
While many people believe that banks play only a narrow role in the economy- taking deposits and making roles- the modern bank has had to adopt new roles to remain competitive and responsive to public needs.4 Banking principal roles today are as follows:
a) The intermediation role– Transforming savings received primarily from households into credit (loans) for business firms and others in order to make investments in new buildings, equipment, and others goods.
b) The payment Role- Carrying out payments for goods and services on behalf of their customers.
4 See Commercial Bank, R.S.Peter, P 9, 3rd para
c) The guarantor role- Standing behind their customers to pay off customer’s debt when those customers are unable to pay.
d) The risk management role- Assisting customers in preparing financially for the risk of loss to property and persons.
e) The savings/ investment advisor role-Aiding customers in fulfilling their long-range goals for a better life by building, managing, and protecting savings.
f) The safekeeping/ certification of value role- Safeguarding a customer’s valuables and appraising and certifying their true market value.
g) The agency role– Acting on behalf of customers to manage and protect their property or issue and redeem their securities
h) The policy role- Serving as a conduct for government policy in attempting to regulate the growth of the economy and pursue social goals.
Modern banks offer a wide range of financial services, including: 5
- Payment services
- Deposit and leading services
- Investment, pensions and insurance services
5See Introduction To Banking, C.Barbara. G. Claudia. M.Philip, p35, 2nd para
Payment Services: An important service offered by banks is that they offer facilities that enable customers to make payments. A payment system can be defined as any organized arrangement for transferring value between its participations. Heffernan (2005) defines the payment systems as a by -product of the international process, a it facilitates the transfer of ownership of claims in the financial sector. These payment flows reflect varieties of transactions:
- Credit transfer
- Standing orders
- Direct debits
- Plastic cards
- Credit cards
- Debit cards
- Cheque guarantee cards
- Travel and entertainment cards
- Smart, memory or chip cards
Deposit and lending services: In addition to payment services personal banking includes the offer of a broad range of deposit and lending service. These are as follows6:
- Current or checking account
- Time or saving deposits
- Consumer loans and mortgages
6ee Introduction To Banking, C.Barbara. G. Claudia. M.Philip, p31, 3rd para
Investment, pensions and insurance service:
- Investment– Offered to retail customers include various securities- related products including mutual funds, investment in company stocks and various others securities- related products, In reality there is a strong overlap between saving and investment products and many banks advertise these services together.
- Pensions and Insurance services– Are nowadays widely offered by many banks. Pension’s services provide retirement income to those contributing to pension plans. Contributions paid into the pension funds are invested in long-term investments with the individual making contributions receiving a pension on retirement.
A number of innovative financial products have been developed in recent years, taking advantage of rapid technological progress and market development. Transactions made using these innovative products are accounting for an increasing proportion of the volume and value of domestic and cross border retail payments. Mainly we can refer to two categories of payments products7:
- Remotes payments
7 See Introduction To Banking, C.Barbara. G. Claudia. M.Philip, p31, 3rd para
Recent changes and discussions regarding increasing bank capital standards suggest that community banks could be required to add additional capital to their operations. Any change could seriously impact their ability in maintaining historical service to small businesses and the banking needs in local communities:
Banking regulators have jointly adopted a change to establish a standard minimum capital floor for all banks. This change moves the larger banks off the Basel II risk weighted approach for minimum capital determination to the same level expected for smaller banks.
All banks want a level playing field, however it is broadly recognized that minimum standards are only a base determinant and additional capital is nearly always mandated for specific bank weaknesses and higher risk activities. The expectations for total bank capital standards remain uncertain as the Fed openly considers the level of additional capital that will be required in response to Dodd-Frank.
By the end of 2011 the Fed must establish special capital standards for banking institutions determined to be “systemically” important. This requirement will include mandating additional capital for about 30 banks and financial institution larger than $50 billion and is intended to provide greater protection and economic well being in the event of any future systemic financial crisis.
Many are speculating that this change will require a capital ratio increase of at least 3% for the included institutions. The Basel III committee recently established a similar systemic international standard of from 1 to 2 1/2%. Fed Governor Tarullo spoke of the possible need to double the 7% Basel III minimum capital standard to meet this objective. A 3% increase for the five largest U.S. banks alone could require an additional $250 billion of capital and most likely twice that amount when all the largest institutions are included.
These largest companies operate in markets worldwide including traditional commercial banking, investment banking, trading, arbitrage, market-making, underwriting, distribution, insurance and derivatives. These companies conduct these activities under varying capital standards, regulations and complex multiple supervisory authorities.
It is easy to accept that greater capital cushions could provide increased comfort to the risks associated with financial institutions. However, this collection of multi-market and multi-industry based institutions are so large, move so fast and are so intertwined that additional capital could never fully protect the system from unexpected financial chaos. What should be recognized is that capital alone, while comforting, will not prevent governments from being the final backstop to financial calamity as most of these largest companies are still “too big to fail.”
Interestingly the possible failure of the complex securities, insurance and mega-loan activities of the largest companies underlie the fears of Washington. In this group there is no comparability to the business activities or the traditional small business and consumer loan markets that are the mainstay of the nearly 7,000 community banks.
Nothing sounds wrong with greater protection from the unknown impact of financial disruption provided there are no unintended consequences. In an environment of equalizing capital standards, demands for more capital and continuing public apathy toward banks and bankers it’s hard to imagine that new systemic capital requirements will not increase the capital expectations for community banks. Consciously or subconsciously the community banks will most likely be dragged by Washington and banking regulators to higher capital standards. Neither has offered community banks any words of comfort or assurance in this regard.
It’s also hard to imagine that regulators will permit community banks to operate with capital levels less than the largest financial companies. To do so would be a reversal of historical patterns. Increasing capital standards seem evident even though the community banks offer only basic banking products, are not a threat to the financial system and business models are dissimilar from the largest financial institutions.
See Financial Institutions and Market, Madura, pp45-49
A level playing field has always been supported by community banks, but the anticipated capital standard changes for the largest institutions could lead to higher requirements for community banks. The general mantra of Washington is they have never seen a new dollar of capital that they don’t like.
Any changed capital standards impacting community banks should be considered with deep concern for the impact on their ability to facilitate the credit needs and economies of their local markets. At a time when economic and job considerations are so important, any unintended consequences of the new systemic standards on community banks should be avoided.
Moreover, the merger and acquisition process in banking is no linger just a local affair but a increasingly spans continents. For example, leading European banking firms, like Deutsche Bank, are reaching out to acquire banks in the U.S. and elsewhere, such as Bankers Trust company of New York, while top Spanish banks reach into Mexico and the Americans and leading Canadian Banks widen their presence in key U.S. metropolitan areas. Banking like the global economy itself, is becoming an increasingly integrated, worldwide system. Banks merging today have more issues to wrestle with than just how to finance a describe acquisition. They now must consider the impact that new banking combinations have on such matters as local community development, reaching out with services to all segments of each community at all economic levels an preserving jobs in a new age when automated equipment frequently replaces workers. As wee will soon see, this increasingly move to dehumanize and automate banking and to eliminate duplicate banking service facilities in order to save money and offer greater speed and efficiency is propelling many, if not most, banks mergers an rising controversy in many towns and cities. This is an existing time to find out more about how banks function and how truly important they are in our daily lives.
1. R.S.Peter (2002) Commercial Bank Management: Texas A&M University.
2. K.W.Timotht. S. Scott. Macdonald (2003) Bank Management, 5thed: University of South. Carolina Southern, Methodist University.
3. M.Jeff (2010) Financial Institutions and Markets, 9thed: Florida Atlantic University
4. C.Barbara. G.Claudia. M.Philip (2006):University of Wales, Bangor, University of Essex, The University of Wales, Bangor.
5. Kolasa, J. B (1984) Legal Environment of Business
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