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Banking 101: A Review of the U.S. Banking System

This is the ninth and final article in a series of articles on the U.S. banking system. Here we review the nine banking types highlighted in previous articles.

Over the last couple of months, a lot of information has been thrown your way. For sure you won’t remember everything. The purpose of this summary is to put in one place essential nuggets from each article in the series.

Credit Unions

Perhaps the biggest question people have is how credit unions are different from banks. What’s key to know is that they are structured quite differently. How so? Credit unions don’t issue stock or pay dividends to outside shareholders, so they have to worry about third party interests. Each person who holds an account is a member, and each member has one vote, which is not the case at for-profit banks where powerful stockholders tend to have the loudest voice in the room when it’s decision-making time. Remember too, that all earnings go straight back to members in the form of favorable interest rates and lower fees that other for-profit institutions usually can’t beat.

Savings & Loan Associations

If you’re wondering how S&Ls work, to make it simple, think of it this way – the money you deposit into your savings account is used to fund the money the S&L doles out in loans. When you get ready to decide where to put your money, savings and loans have some advantages. Because many keep the loans they originate in their own portfolio instead of selling them off for securitization, you reap the benefit. How? This means the institution has more flexibility in their underwriting criteria than do lenders that sell off their mortgages to Fannie, Freddie and Wall Street securitizers. The bottom line – borrowers with atypical profiles or those interested in atypical properties might be more likely to get the thumbs up for a nontraditional deal in the S&L space.

Mutual Banks

Mutual banks come in a variety of flavors, but the most dominant are savings and loan associations and savings bank. What makes them unique? They are owned in a cooperative form. They have no stockholders and no stockholder pressure.

Do know that they cannot issue capital stock and because of that, they must keep an extra capital cushion for hard financial times. They are member-owned, and that structure can be good for you, as mutual banks may be friendlier to its member-owners and surrounding community when you come calling. Of much importance too, that different relationship can mean lower interest rates and fees on loans and better deposit rates.

Commercial Banks

Commercial banks are probably the ones you are most familiar with – think big names like Bank of America and Wells Fargo.

Commercial banks serve individuals, businesses and organizations. What they do varies of course, but basically, they offer deposit accounts, as well as loans.

Their role play in the economy is huge. They are the engine. Without them, nobody’s going anywhere. Commercial banks are for sure, the granddaddy of financing for private capital investment. Where else do people and companies go when they need the kind of cash to move the needle in their business – be it purchasing equipment or in the case of regular folk -- the all important mortgage? When money is being spent in these areas, it’s always a sign of economic health. Simply put, commercial banks make the world go around.

Community Banks

Lending is a specialty for community banks. They provide residential, commercial, business and corporate loans, letters of credit, EXIM lenders, grant providers for CRA, SBA and other outlet grant-guarantee small business and start up loans. They can be creative and collateralize loans differently than big banks.

You’ll likely benefit from an institution that takes into consideration character, family history and discretionary spending when making loans, versus banking behemoths beholden to impersonal qualification criteria, such as credit scoring, with no thought of individual circumstances. Loan decisions are local.

Know too, that unlike large banks that may take deposits in one state and lend in others, community banks channel most of their loans to the neighborhoods where their depositors work and live, helping to keep the area vibrant and growing.

National Banks

There’s an easy way to find out if a bank if a bank is “national”. The institution should have national or national association in its name. Some examples include City National Bank, Eastbank, National Association and First National Bank. Although called a national bank, the institution may or may not have nationwide operations.

National banks can have more locations and branches, and may even have partner banks overseas. But perhaps the biggest differentiator is technology. They made significant investments in technology and are mobile tech leaders. If bells and whistles are important to you, you probably want to check out a national bank.

Foreign Banks Operating in the U.S.

You might be nervous about dealing with foreign banking operations with branches or agencies in the U.S. Truth is, these institutions will look much life a domestic bank IF it is FDIC-insured. A lot of (small) foreign branches operate as uninsured, state-regulated banks, but these branches don’t accept retail deposits – only wholesale deposits from financial institutions or other firms.

Do know that if trouble hits the parent foreign bank, it can transfer funds from a U.S. branch or subsidiary and that happened in the U.S. financial crisis, but reversed during the European sovereign debt crisis, as money flowed back into the U.S. Just as with domestic banks, what matters most is that the account is FDIC-insured.

Relax; these institutions have a good track record. Depositors have not been burned in the past.

Investment and Central Banks

Unlike other banks, these banks don’t take your money. Investment banks have two separate and distinct client groups, companies and governmental entities on one hand (issuer clients) and institutional and primarily wealthy individuals who provide capital (investor clients) on the other.

Investment banks help issuer clients access the capital they need from investor clients through the underwriting of security offerings and the private placement of securities. In that process of underwriting securities, the investment bank sets the terms of the securities such as the price, interest rate, maturity, among other things.

Investment banks also help companies find and help them buy other companies (acquisitions) and they also, assist companies which are looking to sell themselves – also known as merger and acquisitions services.

When it comes to central banks, think of them as the Grand Poobah of a country’s monetary system. In the U.S. that honor is bestowed upon the Federal Reserve, which was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

The Federal Reserve may not take your money, but be clear it has much financial impact on your life – look no further than the interest rate you pay on your mortgage.

Anonymous   |     |   Comment #1
So this is a complete list of the Banks that need to be bailed out during crisis times?
Petert0204   |     |   Comment #2
I think that’s a very important point about credit unions put up here. Yes, their account holders aretheir members. It’s like they have developed a personal financial relationship with the credit union.Members enjoy benefits like low interest rates, few to no fees, community involvement, and in-school banking, which I’m currently using for my son through LUSO Federal Credit Union. Within the next few years, I think credit unions will overtake banks and mortgage brokers in terms of accountholders and financial services.

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