The recent crises in the financial markets and spate of new government regulations have blurred the lines among the different kinds of commercial banks. Many of them now offer the same services but try to differentiate themselves by focusing on particular types of customers.
The banking system consists of commercial banks, credit unions and cooperatives, agricultural banks and savings and loan associations.
Types of Commercial Banks
Commercial banks: Commercial banks are the department stores for financial services. They are corporations whose primary goal is to make a profit. Commercial banks take deposits and extend loans. They make a profit on the interest rate spread between the amount paid for deposits and the rate charged for loans. Banks also earn income from maintenance fees on accounts and overdraft charges. Some commercial banks focus on retail customers, while other banks concentrate on attracting business clients. The Federal Deposit Insurance Corporation insures deposits at commercial banks up to $250,000 per account.
Credit unions and cooperatives: Credit unions are financial institutions organized to serve a group of people with a common interest. They are not open to the general public. Examples of these groups are people who work for the same employer, members of a labor union and alumni from the same college. Credit unions are nonprofit institutions owned by their members. They offer savings accounts, money market accounts, time deposits and check-writing capabilities. Credit unions focus on their communities by making home loans and commercial loans and issuing credit cards to local residents and businesses. Most credit unions have either a state or federal charter and are insured by the National Credit Union Administration. The NCUA insures deposits up to $250,000 per account.
Agricultural banks: Agricultural banks offer most of the services available from a commercial bank, but they concentrate on making loans to farmers. Financing for a farm requires a more specialized knowledge of growing seasons, commodity prices, cost of fertilizer and other expenses unique to agriculture. Congress created the Federal Agricultural Mortgage Corporation in 1987 to create a secondary market for lenders making loans to farmers. The objective is to make funds available for agricultural loans at lower rates than those typically available in the commercial market.
Savings and loan associations: Savings and loan associations are banks that specialize in loans for residential properties and single-family houses. The ownership of these banks can be either by shareholders owning stock or by the bank's depositors and borrowers, known as "mutual" ownership. S&Ls originally offered only savings accounts and time deposits. However, in the last several years, they have begun to offer checking accounts and make business and personal loans in addition to residential mortgages. Savings accounts are insured by the Savings Association Insurance Fund. S&Ls may receive their charters from the Comptroller of the Currency or a state government regulator.
Functions of Commercial Banks in Our Economy
The Federal Reserve Bank uses the commercial banking system to effect changes in the economy. If the Fed wants to stimulate the economy, it can lower the short-term federal reserve rate, making it cheaper for commercial banks to borrow money from the Fed. As a result, commercial banks can offer lower rates to their customers, who are now more likely to take out loans and expand their businesses.
Conversely, if the Fed believes that the economy is growing too fast and inflation is creeping up, it can raise short-term rates to discourage borrowings and slow down the economy.
The Four Agency Functions of Banks
The four agency functions of banks include accepting deposits, making loans and advances, negotiating and settling checks and dealing in foreign currencies. Some prefer to cultivate retail customers, while other banks concentrate on working with businesses. Credit unions offer the same services as commercial banks, but their customers all have a common connection. Farming is a large part of our economy and requires banks with specialized knowledge of agriculture.