Types of banks
There are many various types of banks around the world, and in each category there are as within any industry many competitors. One might ask why there is a need for so many types of banks, this question does not have a simple single answer, but for the sake of not over complicating it here, a simple answer would be that each bank is specialized in their own field. Below we will list the various types of banks and in the more common know types we will give a small description of their characteristics:
- Consumer’s Bank
- Community Development Banks
- Credit Unions
- Commercial Banks– collect money from people in various sectors and give loans to businessmen. It makes profits on interest on the loans.
- Ethical Banks
- Exchange Banks
- Federal or National Banks – these banks control the principles and policies of other banks across the country. These banks are managed and run by the government.
- Indigenous Banks– native banks. They are normal money lenders. They collect money from the community and provide loans to businessmen and industrialists for a short amount of time.
- Industrial Development Bank
- Internet Bank
- Investment Banks
- Islamic Banks
- Land Development’s Bank
- Merchant Banks
- Mortgage Banks
- Offshore Banks– they are private banks except that they have little tax to pay for their transactions; there is very little regulation for this bank.
- Private Banks– these banks are not for the general public or community. They serve entirely for private personnel’s assets and transactions alone.
- Savings Banks– these banks are suited for employees with a monthly salary.
- Spare Bank
- Universal Banks– these banks have a wide spectrum of financial assistances to provide. Insurances to stocks, they promote everything across all countries around the globe.
You should also understand that some banks can be privately or publicly owned, the difference being privately owned means that a person or group of people (shareholders) own and control the bank, whilst publicly owned means the government owns a minimum of 51%.
How banks work
In today’s economy banks are essential, though we should not forget that banks are business orientated institutions, and as such their goal is to make profits. So how does a business with no visible product make a profit? The answer is they do have a product, money. In its basic form, what banks do is borrow lots of small amounts of money. They borrow it from the deposits that are put into bank, which they pay back with a small amount of interest. The money they borrow, they then relend in fewer but larger amounts, charging higher interest on. The difference between the money they receive back from the borrower and the money the bank returns to its depositors is that bank profit.
The problem with banks
As we now understand banks make money by lending money. In today’s banking world it is a complicated web of loans, to the point where banks are lending and borrowing from other banks. This means two things:
- Banks are lending more money than they hold, and
- All the banks are inter-tied to each other.
This is a perfect combination for disaster, if a certain amount of the loans go bad (not paid back) the bank will have no buffer, making them very vulnerable. As they are all so closely linked, if one bank starts to wobble, it will have a knock on affect and potentially bring the whole system down. As was the case in the 2008 banking crisis. However, there are other factors that need to be looked at, one of those being trading. Trading could be seen as a form of “educated gambling”, where banks bet with the money they have borrowed. As a depositor you tend to have very little say in what exactly they bet on. To make matter worse the bankers doing the betting have a direct correlation between their trading and their salary. If you take no risk because the money you trade is not yours, yet reap massive rewards if it all goes well, it goes without saying that you will take more risks. More risk makes the banks even more susceptible to collapse.
Solutions to the global banking issue
Unfortunately, we are too far down the road to be able to make sudden changes, but after the devastating effects of 2008’s recession governments are looking for solutions. There are many ideas and even more variations on how to stop this happening again. Governments are trying to push forward legislation that would force banks to hold a certain amount of assets in balance with the loans on their books. Another idea is to stop the culture of bonuses for success with the traders; needless to say, this is not so popular amongst bankers. Alternatively, you could separate the trading from the bank all together, but whilst making the bank secure it would eat into the profits and would most likely have to be made up in different ways. Many governments have introduced schemes where deposits (usually of up to 100,000) will be covered and paid out, should the establishment become insolvent, the money will come from the establishments themselves as only establishments that opt in will be covered.
The best thing to do is look after yourself, how to do this? One way to do so is to utilize the government backed schemes and open only with establishments opting in on the schemes, not to keep all of your proverbial eggs in one basket; it would be wise to open multiple accounts, with different banks in different jurisdiction, and not to exceed the guaranteed amount. However, it certainly does not suit everyone, and even if it does suit one, there are certain issues to it (not many well-established banking institutions are eager to work with ‘low profile’ clients).
To sum up, it is diffidently impossible to manage in today’s world by keeping all your savings under the pillow, everyone needs to use banks either for efficient trading, or for safekeeping and investments. However, the decision of which banking institution to choose is a hard one and it will determine the future success of the goal that you want to achieve. Thus, it should be taken seriously. One should give a good thought about risks and come up with a well-weighed up strategy for co-operating with banking institutions, prior to opening any bank accounts.