You may be hearing about the banking system types of banking in the banking industry, in this post you will know what it is all about and also the major types of it.
During my first year in the university, i thought that banking system and banking are the same till we had a lecture on it and i got to know that the differs. If your are studying banking and finance as a course, you will definitely come across the banking system.
What is Banking
Banking system is the process by which financial institution like the commercial banks provide financial services to its customers. Financial services includes creation of bank account, making payments or deposit in the bank, collection of loans in the bank etc. All the services that a bank gives to you as a customer is what banking system is all about. You should also note that a central bank is a financial institution and so money creation by the central bank is also part of the banking system.
The banking system has many types and functions but in this post i will only touch the major functions and types of banking system in the banking industry.
Types of Banking System
Below are the major types of banking system we have.
- Private Banking
- Home banking
- Wholesale banking
- Mixed Banking
- 5. Fractional Reserve banking
Private banking is a highly professionalized and global management of a client’s assets. It seeks to meet the investment, wealth, financial and tax planning needs of individuals or family groups with a high equity.
Private banking is therefore dedicated to financial advisory and asset management. For this, many variables are taken into account, for which it is essential to make a good profile of the client:
Objectives of profitability.
For a private banking service to be as such there must be a bank-client relationship that stands out for offering a personalized service. It is necessary to distinguish between customer banking and product banking:
Customer banking: focuses on making profitable the relationship with the customer, seeing it as a whole and not as a sum of products and services.
Product Banking: The placement of products is not based on the client, but on the commercial campaigns, not taking into account the personalized service.
There are several ways to structure a Private Banking service: American style (private banking from investment banking), more focused on the corporate client from wholesale banking, and the Swiss-Spanish style: Private Banking plus patrimonialist, overturned in that A high-quality client who seeks above all quality of life and control over his assets, which he wants to keep away from taxes, inflation, investment costs, and invests in conservative products.
Main Features of Private Banking
It satisfies the global needs of the client’s heritage through:
Patrimonial, financial and fiscal planning.
The best and most complete range of products and services.
Based on a strong interpersonal relationship with the client.
Main Private Banking Services
The range of services in private banking is very varied:
Family office services.
Investment in real estate assets.
Availability of a wide range of mutual funds.
SICAV and structured products.
Management of movable and non-movable assets.
Tax optimization of the estate.
It is called home banking to all those resources, tools and provisions aimed at bringing banking services as close to the customer as possible.
Within this, we can find several types of banking services depending on the route of communication. Thus, online banking, through telemetric means, telephone banking, through the telephone to perform various operations and checks, digital banking, which is a broader term that collects all of the above, through digital applications.
In general, home banking is a broad concept that consists of carrying to all corners the possibility of carrying out transactions; transactions of any kind as far as banking services are concerned.
Evolution of home Banking
The term home banking began to be used in the late 1990’s when opportunities arose to be able to perform any management beyond the physical headquarters of any banking office and a broader time than this.
In recent years, all banks have made improvements and adaptations to start online banking or banking, so that today it is possible to carry out any type of operation through various methods without having to go to a bank office. This sectorization has led to the emergence of purely digital banks, through telematic means, without physical banking offices, or traditional banks have created sections and banks in parallel with those that operate digitally, so as not to lose market share.
Today, home banking has stopped being a complement to traditional banking to play the main role in the operations and consultations of customers, radically transforming the sector and betting on digital banking , in which some banks see a Its strategy.
Wholesale banking is one for large-scale operations, usually with large-sized enterprises or organizations of great importance.
Whole sale banking also called wholesale banking, corporate banking or corporate banking. This is because this type of banking has among its client’s institutions and business organizations, so they have a special and more personal attention than in commercial banking.
Wholesale banking, intended for large volumes of money from major economic operations can be divided into two segments:
Investment banking: financial structures, mergers and acquisitions (M & A), advice, etc.
Corporate Banking: Management of liabilities (lines of credit, factoring or confirming), management of fixed assets (loans, leasing, renting, etc.).
While commercial banking is aimed at small savers and investors, wholesale banking has fixed its market in those customers who, because of their volume, operations and size, need a more direct and private channel than the rest . This type of bank has a smaller number of operations but a greater number of operations, such as issuance of debt, loans, custom financing, sale of corporate bonds and, above all, investment banking of large patrimonies.
The Model of Wholesale Banking
The model of wholesale banking can be found in two ways:
Commercial and private line: in this case, the bank proposes a single manager to operate for the organization that gives him the right to negotiate and process savings and financing privately. This line of business is employed by large quoted companies or large volume operations.
General line: even outside the commercial or retail banking, several organizations have a private but common assistance to several business units.
In general, wholesale banking has a fundamental role in managing the flow of finance and investment of large organizations, since they have highly specialized and large accounts oriented personnel, in operations that cannot be supplied by commercial banks, So that they have several institutional agents of financing and investment and act as intermediaries between them.
It is called mixed banking to the one that operates in the commercial bank or the consumer, as well as in the wholesale or industrial banking and also the one that is in public and private capital.
Initially, banking has been divided between retail and commercial banking, industrial or corporate banking, and particularly investment or corporate banking, dedicated to large companies and large-scale operations.
Until recent times, banking was well defined and dedicated to its previously defined sector, however, with the expansion and empowerment of banks, traditional retail banking began to operate with products dedicated to small and medium-sized enterprises and to finance operations of large Companies , while industrial or business banking was opening up to the traditional consumer sector as a way of diversifying its market and offset the loss of weight of the industrial sector in the economy as a whole.
Mixed Banking as an Entity whose Capital is made up of state Contributions and Private Capital.
At the same time, the term mixed banking also refers to that bank whose capital is composed of public and private resources.
The public banking has always been an instrument of states to regulate certain extent and operate your criteria in the banking market, especially before deregulation and opening of the 80s and 90’s of the twentieth century.
Over time, as the liberalization of the sector has been increasing, public banks have been absorbed by traditional private banking, except in some cases where only part of the capital has been sold, either with a majority or Minority of the public sector, but where in any case it had room for action and direction.
In this sense, mixed or semi-public banks have been the main sponsors of financing lines to SMEs and entrepreneurs, opting for a greater ease in financing and a greater margin of return, thus showing its initial principles.
Fractional Reserve Banking
Fractional reserve banking is a banking system in which banks hold a
fraction of their clients’ deposits in reserves. This fraction is known as the cash ratio.
Under a fractional reserve banking system, banks are not required to maintain 100% of their customers’ deposits in their reserves. In this way they can lend the part of the deposits that they are not obliged to keep in reserves, which allows them to obtain benefits and remunerate the deposits. This system is based on the assumption that depositors will never withdraw all their money at the same time.
Fractional reserve banking allows a phenomenon called a bank multiplier to occur. The bank multiplier is the expansion effect of the amount of money that occurs when a bank receives a deposit and only maintains a fraction in reserve, lending the rest. By lending money deposited, the bank allows two people at a time to have the same money. This process is repeated when the loan recipient deposits their money into a bank. This is why the monetary base does not coincide with the monetary aggregates (M1, M2, M3 …).
Implications of Fractional Reserve Banking
The fractional reserve implies that banks are in constant risk of insolvency, since they cannot cope with a massive withdrawal of deposits. When this situation of massive withdrawal of funds occurs, there is a so-called banking panic.
To mitigate this constant risk, the fractional reserve system usually has a lender of last resort. This lender is in charge of injecting liquidity to the banks in complicated situations to avoid the banking panics. In most cases the lender of last resort is the state through the central bank. It is the same central bank that sets what percentage of deposits a bank should hold in its reserves. This percentage is called cash reserve ratio, and is one of the mechanisms of monetary policy of central banks available.
Characteristics of Banking System
Branch banking is a system where the banking business is carried on by single bank with a network of branches throughout the length and breadth of the country. The bank will have a head office in one town and branches in different parts of the country. The branch manager in accordance with the regulations and policies of the head office directs the affairs of the branch. Each bank is a single entity owned by a group of shareholders and controlled by a group of directors.
A bank may decide to establish a branch banking organization, when regulation permit, particularly if it serves a rapidly growing region and finds itself under pressure either to follow its business and household customers as they move into new areas or lose them to more conveniently located competitors.
2. Unit Banking
In the unit banking system, the banking operations are carried through a single office and confined to a particular area. The banks maintain no branches. Unit Banks, offer all their services from one office, though a small number of services (such as taking deposits or casing checks may be offered from limited service facilities, such as drive in windows, automated teller machines, and retail store pint of sale terminals that are linked to the bank’s computer system. These organizations are common in U.S. banking today.
Correspondent banking system is a feature of unit banking system.
The unique feature of unit banking system is the correspondent banking system. This is an arrangement with which banks carry account with banks in the neighboring cities and these banks in turn have accounts with the large cities like New York. Banks in New York have correspondent bank relation with many branches throughout the country. The small bank in the small community, which holds deposits with the city bank, is the responded bank while the city bank holding the deposits for the small bank is the correspondent bank.
The major service of correspondent bank is clearing of cheques and movement of funds from one place to another. Another valuable service rendered by the bank is strengthening the financial resources of banks during tight money periods. It also acts as source of information and helps in various banking operations.
3. Chain banking
Chain banking refers to the system where one or few individuals control two or more banking companies or by the same group of persons through purchase of shares of such banks.
The main difference between the two systems is that in case of group banking, the affairs of the group are controlled by the holding company, whereas in case of chain banking system has more or less the same advantages and disadvantages of the group banking system.
4. Group Banking:
Group banking is a system where a group of banks are brought under the control of a holding company. The holding company controls the affairs of all units in the group. But each bank in the group maintains its separate identity. The purpose of group banking is to unify the management of banks, to achieve economies of large-scale operation and to grab more power.
The chief advantage of this system is that each bank need not carry large cash reserve; such cash reserves are concentrated in one or few member banks of the group. In times of need the bigger banks will help the smaller banks. Secondly, economies of large-scale production can be achieved by cutting down operating cost, by purchasing supplies in bulk and improving the efficiency of management.
Under group banking system, both banking and non-banking companies are referred to as affiliated banks. The group banking and chain banking systems are found in the United States.
The above are the major types of banking system we have in banking.