Types of Bank

Commercial or retail banks are businesses that trade in money. They

receive and hold deposits, pay money according to customers’ instruc-

tions, lend money, offer investment advice, exchange foreign currencies,

and so on. They make a profit from the differences (known as a spread or

a margin) between the interest rates they pay to lenders or depositors and

those they charge to borrowers. Banks also creates credit, because the

money they lend, from their deposits, is generally spent (either on goods

or services, to settle debts), and in this way transferred to another bank

account – often by way a bank transfer or a cheque (check) rather than

the use of notes or coins – from where it can be lent to another borrower,

and so on. When lending money, bankers have to find a balance between

yield and risk, and between liquidity and different maturities.

Merchant banks in Britain raise funds for industry on the various fi-

nancial markets, finance international trade, issue and underwrite se-

curities, deal with takeovers and mergers, and issue government bonds.

They also generally offer stockbroking and portfolio management ser-

vices to rich corporate and individual clients. Investment banks in the

USA are similar, but they can only act as intermediaries offering advisory

services, and do not offer loans themselves. Investment banks make their

profits from the fees and commissions they charge for their services.

In the USA, the Glass-Steagall Act of 1934 enforced a strict separa-

tion between commercial banks and investment banks or stockbroking

firms. Yet the distinction between commercial and investment banking

has become less с ear in recent years. Deregulation in the USA and Brit-

ain is leading to the creation of ‘financial supermarkets’: conglomerates

combining the services previously offered by banks, stockbrokers, insur-

ance companies, and so on. In some European countries (notably Ger-

many, Austria and Switzerland) there have always been universal banks

combining deposit and loan banking with share and bond dealing and

investment services.

A country’s minimum interest rate is usually fixed by the central

bank. This is the discount rate, at which the central bank makes secured

loans to commercial banks. BANKS lend to blue chip borrowers (very safe

large companies) at the base rate or the prime rate; all other borrowers

pay more, depending on their credit standing (or credit rating, or credit-

worthiness): the lender’s estimation of their present and future solvenсу.

Borrowers can usually get a lower interest rate if the loan is secured or

guaranteed by some kind of asset, known as collateral.

In most financial centers, there are also branches of lots of foreign

banks, largely doing Eurocurrency business. A Eurocurrency is any cur-

rency held outside its country of origin. The first significant Eurocur-

rency market was for US dollars in Europe, but the name is now used

for foreign currencies held anywhere in the world (e.g. yen in the US,

DM in Japan). Since the US$ is the world’s most important trading

currency – and because the U.S. has for many years had a huge trade

deficit – there is a market of many billions of Eurodollars, including

the oil-exporting countries’ ‘petrodollars’, Although a central bank can

determine the minimum lending rate for its national currency it has no

control over foreign currencies. Furthermore, banks are not obliged to

deposit any of their Eurocurrency assets at 0% interest with the central

bank, which means that they can usually offer better rates to borrowers

and depositors than in the home country.

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