1. Bank organization and operation. (EBB Unit X + Corbett Unit 1)

Banks are among the most important financial institution. The way in which a bank is organized and operates is determined by its objectives. The first important function of a central bank is to accept responsibility for advising the government on the making of the country’s financial policy, and then to see that it is carried out. The aim of commercial banks is to earn profit.

The commercial bank that provides the same range of services year after year is less likely to be successful. Successfully competing in the constantly changing global business environment requires market driven strategies that are responsive to customer’s needs and wants. Executives who do not recognize the changes in the market for products and services will not be able to cope with the unprecedented competitive pressure in the market place. With the global increase in the number of competitors banks face in their major markets, more and more banking firms have become market-driven and more alert to the changing service demands of their customers and also to the challenges posed by bank and non-bank competitors.

Banks are usually organized to follow their functions and supply the services demanded by them as efficiently as possible. More over, because larger banks generally play a wide range of roles and offer more services, a bank’s size is also a significant factor in determining how banks are organized.

Small bank, typical of hundreds of banks serving small and medium-size communities is heavily committed to attracting matter consumer-oriented deposits and making consumer installment and small business loans. A bank like this is often called a retail bank.

The service operations of a small bank usually are monitored by a cashier and auditor working in the accounting division and by vice-president heading up the bank’s loan, marketing and trust departments. These officers report to the senior executives of the firm, consisting of the board chairman, the president and senior vice-presidents. Senior management, in turn, reports periodically (at least once each month) to members of the board of directors – the committee selected by the shareholders to set a policy and oversee the bank’s performance. There is often close contact between top management and the management and stuff of each line division. Such banks present a relatively low risk working environment, but with limited opportunities for rapid advancement or for the development of new banking skills. The organization chart of a large money bank is much more complex.

The large banks possess some potential advantages over small and medium-size banks. Because the largest institutions serve many different markets with money different services, they are better diversified, both geographically and by product line, to withstand the risks of a fluctuating economy. They also possess the important advantage of being able to raise financial capital at relatively low cost.

The oldest and most common banking organizations in the US are unit banks, which offer all of their services from one office though a small number of services (such as taking deposits or cashing checks) may be offered from limited-service facilities, such as drive-in windows, automated teller machines (ATM) and retail store point-of-sale (POS) terminals. The tendency in recent years has been for most banking institutions to become more complex organizations. When a bank begins to grow it usually adds new services and new facilities. With them come new departments and divisions to help the management more effectively to focus and control the bank’s resources and services the most profitable customer segments.

Where law and regulations permit the bank may form a branch banking organization. The full range of banking services is offered from several locations, including head office and one or more branch offices.

2. Types of banks and their functions (Corbett Unit 1)

Primarily all banks gather temporarily idle money for the purpose of lending to others and investments which bring gain in the form of return, profit and dividends etc. However, due to the variety of resources of money and the diversity in lending and investment operations, banks have been placed in various categories, such as commercial banks, savings banks, merchant banks, mortgage banks, consumer banks, investment banks, development banks, cooperative banks, eximp banks and central banks etc.

Commercial Banks

The commercial banks receive deposits from the general public which are repayable on demand upon written orders of the depositors. As their most distinctive feature the commercial banks maintain chequing accounts for the constituents. The commercial banks are also distinguished for providing short term finance to trade,0 commerce and industry to enable these sectors to expand their productive activities.

Merchant Banks

Merchant banks are those which have been mainly financing the domestic and international trade in United Kingdom. During the late eighteenth and early nineteenth centuries the trade between countries was financed by bills of exchange by well reputed merchant houses for which they would charge a commission for their service. Thus the business of accepting bills of exchange to finance the trade developed and gradually these business houses entered into other banking activities and became known as “merchant banks”. Since all the commercial banks, in addition to other banking functions, also deal in trade financing, the term ‘merchant banks’ has gradually faded away.

Savings Banks

The basic purpose of these banks is to inculcate the habit of savings in the people. The savings bank deposits are not repayable upon only the written orders of the depositor but the depositor or his agent has to appear personally at the saving bank to make withdrawal, and for this purpose he must present a pass hook, a certificate of deposit or some similar documents to prove his right to receive payment. Post Office Savings Banks and Savings Account at national Saving Organization are well known operational Savings Banks.

Mortgage Banks

These banks mainly deal in loans for the acquisition or construction of real estate against the security of mortgages. Quite a few such banks are operating in developed part of the world. Savings, and Loans associations and farm-loan associations are some of the well known forms of the mortgage banks.

Consumer Banks

These banks provide finance for purchasing consumption goods for the use of the borrowers. Consumer finance companies, sales finance companies and credit unions are some of the popular forms of consumer banks.

Investment Banks

The investment banks assist business houses and the governmental bodies to raise money through the sale of stocks and bonds for usually long term purposes. These banks perform the usual functions of raising deposits of idle money from the public and finance the business houses and other bodies.

Development Banks

These banks have been established to provide long term development finance to the trade, commerce, and industry. Generally government owned banks, established under a specially promulgated law. Agricultural Development Bank and Industrial Development Bank are every well-known development banks. 

Cooperative Banks

These are the banks established and registered as a cooperative venture to provide banking facilities to the members of the cooperative. The Federal Bank of Cooperatives is well known such bank.

Eximp Banks

These are the banks which provide finance for promotion of imports and exports to trade, commerce and industry, These bank arc contributing greatly towards the expansion of international trade of developed countries, where they function mainly in private sector

Central Banks

Central banks occupy unique position in the banking structure of a country because they have been entrusted with the responsibility of controlling the money supply, interest rates and financial market of the country for the purpose of economic development. Bank of England and Federal Reserve Bank of U.S.A. are well known central banks.

Functions of commercial banks Almost every bank performs various functions useful to its customers, but some of which are not essentially bound up with banking, and may be performed by institutions that are not truly banks. Among these are:

(a) Maintaining a safe-deposit vault, where space may be rented by an individual to keep his valuable papers, jewels, etc. The customer does not usually deliver to the bank possession of the valuables, but himself retains the key to the box, which the bank has no right to open. In larger cities this work is often done by separate institutions.

(b) Acting as money-changer to buy and sell moneys of different nations. This function is of less importance in America than elsewhere because of the great size of our country and of the small portion of our boundaries touching those of other nations using different monetary units. Moreover, the function is in large part performed for Americans by ticket agencies at the ports of embarkation and by the steamship companies en route.

(c) Selling bonds and other investments to customers. In smaller communities the customers of a bank turn to it as the best source of information for safe investments of personal or trust funds. This opens to it a new possibility of service. Large investments, however, are usually made through the agency of more specialized investment brokers.

(d) Acting as trustee and business manager for passive investors, and especially as executor and administrator of estates or as guardian of a minor heir. This function was taken up rapidly after about 1890 by trust companies3 organized under state laws, and after 1918 (as a result of an act of Congress) by many national banks.

(e) Receiving time deposits at a low rate of interest to lend or invest in securities at a higher rate of interest. Such time deposits are not subject to withdrawal by customer's check, excepting after notice to the bank (if required). Receiving time deposits is the essential function of savings banks (as distinct from commercial banks) and will be more fully discussed in a later chapter.

(f) Selling its credit, that is, giving its promise to pay at some other place, or at some other time, in return for a payment that yields a profit.

3. Bank services. New services in banking. (EBB Unit XI + Corbett Unit 2)

Any modern full-service bank should provide the widest variety of services and perform the widest range of functions. It can be:

• the credit function

• the trust function

• the insurance function

• the brokerage function

• the investment banking or underwriting function

• the cash management function

• the thrift or saving function

• the payment function

• the investment and planning function

The service menu of banks does not remain unchanged, as new services are constantly being introduced and developed by commercial banks. Many of them offer a combination of wholesale and retail banking. The former provides large scale services to the corporate sector. The letter mainly provides smaller scale services to the general public.

Trust services are one of the most important and rapidly growing bank service. Trust operations include the management of the property and other assets owned by a bank customer and administration of customer’s security holdings and borrowings.

Usually banks act as middleman between market and customer, making investment and management decisions. The bank’s trust operations are usually divided into three categories.

The first one is personal trust services.

The second one is business trust services.

And the last category includes trust services for charities and nonprofit organizations.

Each involves a fiduciary relationship between bank and customer.

Banks provide a wide range of trust services for individuals and families in the form of estate settlements trust administration and agency services. Also bank trust divisions act as agents for corporations by issuing securities on the business customer’s behalf, paying dividends and retiring the securities at maturity.

Trust departments also handle transfers of ownership of corporate stock, stock splits, and conversions of stock into debt, and they issue proxies and count votes in connection with annual stockholder meetings.

Today, banks frequently serve as trustees under indenture. The bank as trustee must make sure all bond covenants agreed to by the issuing corporation are adhered to and that all required liens against the company's property are duly filed and recorded. The trust department will set up and manage a sinking fund, investing all monies that the bond issuer contributes to that fund periodically with the intent of eventually redeeming the bond issue.

Bank trust departments keep records on which investors purchase commercial paper, see that any notes purchased are actually delivered to the investors involved, and pay off the holders of those notes on the maturity date. Banks also issue letters of credit backstopping issuers of commercial paper in order to reassure investors that the bank will pay off a note issue if the borrowing corporation cannot do so. A bank's trust department will receive and hold any credit letters issued by other lending institutions and check to see that all the terms of those credit letters are being adhered to by borrowing companies.

[More over the trust department set up and manage a sinking fund for the benefit of their clients. Also banks present a great deal of other services and among them is issuing of letter of credit. It refers to a commission of one thrift institution to another to pay the said sum of money]. - сокращенный вариант двух предыдущих абзацев.!

Many banks offer real estate brokerage services to the customers, selling a home or commercial structure and then financing the sale. Sometimes banks acquire realty companies in order to be able to offer a larger menu of financial services.