Bank

What Is a Bank?

A bank is a financial institution licensed to receive deposits and make loans. Banks may likewise offer financial types of assistance, for example, wealth management, currency exchange, and safe deposit boxes. There are several various types of banks including retail banks, commercial or corporate banks, and investment banks. In many countries, banks are regulated by the national government or central bank.

Understanding Banks

Banks are a vital part of the economy since they offer essential types of assistance for the two consumers and businesses. As financial services suppliers, they give you a safe place to store your cash. Through an assortment of account types, for example, checking and savings accounts and certificates of deposit (CDs), you can conduct routine banking transactions like deposits, withdrawals, check composing, and bill payments. You can likewise set aside your cash and earn interest on your investment. The money stored in most bank accounts is federally insured by the Federal Deposit Insurance Corporation (FDIC), up to a limit of $250,000 for individual depositors and $500,000 for jointly held deposits.

Banks additionally give credit opportunities to individuals and corporations. The bank loans the money you deposit at the bank — short-term cash — to others for [long-term debt](/longtermdebt, for example, vehicle loans, credit cards, mortgages, and other debt vehicles. This cycle makes liquidity in the market — which makes money and keeps the supply going.

Just like some other business, the goal of a bank is to earn a profit for its owners. For most banks, the owners are their shareholders. Banks do this by charging more interest on the loans and other debt they issue to borrowers than what they pay to individuals who utilize their savings vehicles. For a simple model, a bank that pays 1% interest on savings accounts and charges 6% interest for loans earns a gross profit of 5% for its owners.

Banks create a gain by charging more interest to borrowers than they pay on savings accounts.

A bank's size is determined by where it is found and who it serves — from small, community-based institutions to large commercial banks. As per the FDIC, there were just more than 4,200 FDIC-insured commercial banks in the United States starting around 2021. This number incorporates national banks, state-sanctioned banks, commercial banks, and other financial institutions. However traditional banks offer both a brick-and-mortar location and an online presence, a recent fad in online-just banks arose in the mid 2010s. These banks frequently offer consumers higher interest rates and lower fees. Convenience, interest rates, and fees are a portion of the factors that assist consumers with choosing their preferred banks.

How Are Banks Regulated?

U.S. banks went under serious investigation after the global financial crisis of 2008. The regulatory environment for banks has since fixed extensively subsequently. U.S. banks are regulated at a state or national level. Contingent upon the structure, they might be regulated at the two levels. State banks are regulated by a state's department of banking or department of financial institutions. This agency is generally responsible for controlling issues, for example, permitted practices, how much interest a bank can charge, and auditing and examining banks.

National banks are regulated by the Office of the Comptroller of the Currency (OCC). OCC regulations basically cover bank capital levels, asset quality, and liquidity. As verified above, banks with FDIC insurance are furthermore regulated by the FDIC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 determined to diminish risks in the U.S. financial system following the financial crisis. Under this act, large banks are assessed on having adequate capital to keep operating under testing economic conditions. This annual assessment is alluded to as a stress test.

Types of Banks

Retail banks deal explicitly with retail consumers, however a few global financial services companies contain both retail and commercial banking divisions. These banks offer services to the overall population and are likewise called personal or general banking institutions. Retail banks offer types of assistance, for example, checking and savings accounts, loan and mortgage services, financing for cars, and short-term loans like overdraft protection. Numerous larger retail banks may likewise offer their customers credit card and foreign currency exchange services. Larger retail banks additionally frequently take care of high-net-worth individuals with specialty services, for example, private banking and wealth management. Instances of retail banks incorporate TD Bank and Citibank.

Commercial or corporate banks give specialty services to their business clients, from small business owners to large, corporate substances. Along with everyday business banking, these banks additionally furnish their clients with credit services, cash management, commercial real estate services, employer services, and trade finance, among different services. JPMorgan Chase and Bank of America are two famous instances of commercial banks, however both have large retail banking divisions also.

Investment banks center around giving corporate clients complex services and financial transactions, for example, underwriting and helping with merger and acquisition (M&A) activity. Accordingly, they are referred to basically as financial intermediaries in a large portion of these transactions. Clients commonly range from large corporations, other financial institutions, pension funds, governments, and hedge funds. Morgan Stanley and Goldman Sachs are instances of U.S. investment banks.

Not at all like the banks listed above, central banks are not market-based and don't deal straightforwardly with the overall population. All things considered, they are basically responsible for currency stability, controlling inflation and monetary policy, and directing a country's money supply. They likewise direct the capital and reserve requirements of member banks. A portion of the world's major central banks incorporate the U.S. Federal Reserve Bank, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the People's Bank of China.

Bank versus Credit Union

Credit unions fluctuate in size from small, community-based elements to larger ones with thousands of branches across the country. Just like banks, credit unions offer routine financial types of assistance for their clients, who are generally called members. These services incorporate deposit, withdrawal, and fundamental credit services.

Yet, there are a few inherent differences between the two. A bank is a profit-driven entity, while a credit union is a nonprofit organization traditionally run by volunteers. Made, owned, and worked by participants, they are generally tax-exempt. Members purchase shares in the center, and that money is pooled together to give a credit union's credit services. Since they are smaller elements, they will generally give a limited scope of services compared to banks. They likewise have less locations and automated teller machines (ATMs).

The Bottom Line

There are many types of banks offering shifting levels of service and products with the goal that they can meet practically any banking need. A smidgen of research and comparison will guarantee you find the right fit for safeguarding your money, laying out credit, making payments, applying for loans, getting funds, and saving money for future requirements like retirement, crises, homebuying, and so on.

Highlights

• In many countries, banks are regulated by the national government or central bank.
• A bank is a financial institution licensed to receive deposits and make loans.
• There are several types of banks including retail, commercial, and investment banks.

FAQ

Would it be a good idea for me to Choose a Retail Bank, Credit Union, or Commercial Bank?

You ought to consider whether you need to keep both business and personal accounts at a similar bank, or whether you need them at separate banks. A retail bank, which has essential banking services for customers, is the most proper for regular banking. You can pick a traditional bank, which has a physical building, or an online bank in the event that you don't need or have to physically visit a bank branch. You should seriously mull over a credit union, which is a nonprofit institution and is available to serve the necessities of individuals with a common employer, labor union, or professional interest.

Are Any Non-Bank Accounts Insured?

The mission of the Securities Investor Protection Corporation (SIPC) is to recover cash and securities in the event a member brokerage firm fails. SIPC is a nonprofit corporation that Congress made in 1970. SIPC safeguards the customers of all registered brokerage firms in the U.S. This applies to stocks and bonds (securities) and cash that a brokerage firm holds. Brokerage firms rarely fail or close unexpectedly, however assuming this occurs, the SIPC helps close the firm through liquidation and lays out claims processes by which it can safeguard the investor. SIPC safeguards your account for up to $500,000 in securities. This incorporates a limit of $250,000 in cash in your account. This connection will show you a rundown of all registered SIPC members.

What Other Factors Go Into Choosing a Bank?

Bank size is another consideration. Large retail banks are in many cases notable, enormous name banks and have locations all through the U.S., which is advantageous assuming that you travel frequently for work or vacation. You would have simpler access to your funds when you're away and might have the option to keep away from foreign ATM fees.Otherwise, you could find that a smaller bank would offer more personalized customer service and the products you like. A community bank, for instance, takes deposits and loans locally, which could offer a more personalized banking relationship.Choose a helpful location in the event that you are picking a bank with a brick-and-mortar location. In the event that you have a financial emergency, you would rather not need to venture out a long distance to get cash.See assuming the bank you are picking offers different services, for example, credit cards, loans, and safe deposit boxes. A few banks likewise offer smartphone applications, which can be useful.Check the fees associated with the accounts you need to open. Banks charge interest on loans as well as month to month maintenance fees, overdraft fees, and wire transfer fees. A few large banks are moving to end overdraft fees in 2022, so that could be an important consideration.

How Do I Know My Money Is Safe in a Bank?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency made by Congress to keep up with stability and public confidence in the U.S. financial system. The FDIC guarantees deposits; regulates and inspects banks for safety and consumer protection. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. You don't need to purchase this insurance — in the event that you open a deposit in a FDIC-insured bank, you are consequently covered. This site can assist you with finding FDIC-insured banks and branches.