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Types of Banks

Types of Banks

What type of bank is your local bank? What are some of the types of banks that serve the U.S. financial system? Which bank should you use when you want to take out a loan? You will be able to answer all these questions once you read our article on types of banks. Ready? Let's get going!

Types of Banks Summary

Types of Banks Types of banks StudySmarterTypes of Banks, StudySmarter Originals

A bank is a type of financial intermediary that plays a vital role in the economy as it creates the funds necessary for the further development of the economy. Banks are indispensable in a way that they help individuals buy their houses and entrepreneurs establish their startups. Banks do this by accepting deposits and using parts of these deposits to generate loans for their clients. Bank deposits allow depositors to claim their funds back at any time, and banks are legally obliged to match the depositors' withdrawal demand.

Banks can't lend out all of their deposits; they need to keep a portion of it in their reserves in case there are withdrawal demands and due to existing reserve requirements. Reserve requirements are part of the monetary policy set by the central bank of the U.S., which is called the Federal Reserve.

Bank - is a financial intermediary that finances borrowers' investment spending by using funds provided by lenders in the form of bank deposits.

Many types of banks serve their clients in the U.S. economy, including commercial banks, retail banks, community development banks, investment banks, and online banks. While serving similar purposes, all of these types of individual banks have some differences, and all of them are equally important to the U.S. economy.

To learn more about how the banks operate check our explanation on - Banking.

And if you want to learn about how banks create credit that gets the economy moving, check our article on - Money Creation and Money Multiplier.

And, if you are interested in learning about the Fed, then click here - The Federal Reserve!

Commercial Banks

A commercial bank is a type of bank that has a function in the economy to take deposits, provide checking account services, make loans, and provide basic financial services such as certificates of deposits or savings accounts to people and businesses.

Commercial banks are responsible for most financial transactions that take place in the United States. Commercial banks' primary sources of income are mortgages, personal loans, and business loans. Banks earn money by charging interest on the money they lend to borrowers. Customer deposits make their business model possible, which gives banks the funds needed to advance loans. Commercial banks profit by paying lower interest on deposits and charging higher interest on their loans. The higher the difference between these two interest rates, the higher the profit that the bank will gain.

Consider the following example:

a bank may give its savings account customers an annual interest rate of 1% while charging its mortgage customers a yearly interest rate of 4%; the 3% difference is the profit that the bank makes

An additional way that commercial banks earn money is by charging customers for services including charging fees. Depending on the product, costs may range from account fees (monthly maintenance charges, minimum balance fees, overdraft fees) to safe deposit box fees and late fees, among other things. In addition to interest rates, many loan packages include a number of additional expenses.

Checking and savings accounts, loans and mortgages, basic investment services such as certificates of deposit (CDs), and additional services like safe deposit boxes are all examples of what commercial banks offer.

Commercial banks are a significant component of the U.S. economy's infrastructure. Furthermore, they supply customers with necessary services and contribute to creating capital and liquidity in the market.

Think about all the entrepreneurs: one of the primary funding sources for a startup in an early stage is taking out a loan from a bank. Using the loan from the bank, new entrepreneurs can bring change to society and put their ideas into action.

Before Elon Musk received millions of dollars in funding for Tesla, at some point, he had to take loans to put his ideas into action.

Commercial banks are heavily regulated to prevent them from failing to pay back depositors. One of the main regulatory bodies is the Federal Deposit Insurance Corporation, which ensures that funds are returned to depositors if a bank fails. Suppose banks engage in too much risk by making reckless loans and not keeping a portion of their deposits in reserves. They could lead the economy into a financial crisis similar to that experienced during 2008-2009.

Eager to learn more about how banks are regulated? Then what are you waiting for? Click here: Banks Regulation

A commercial bank is a type of bank that functions by taking deposits, providing checking account services, advancing loans, and providing basic financial services such as certificates of deposits or savings accounts to people and businesses

Online and Neobanks

Online banks are the type of banks that function via the use of the internet. They provide similar services to traditional banks, with the main difference being that all the activities in online banks take place through the internet. Customers may do practically all of their banking transactions online, including deposits, transfers, and online bill payments, which were previously only accessible via a local branch. Almost all financial institutions offer some internet banking, which may be accessed through desktop computers and mobile applications.

The types of banking transactions that may be completed online differ from institution to institution. Most banks provide basic services such as money transfers and bill payments, which are available to almost everyone. Customers may also create new accounts and apply for credit cards using online banking websites.

Neobanks is a new form of banking that merges information technologies and conventional banking. These banks are offered by fintech firms that provide banking services through apps and software technologies. Some examples of neo banks include: Chime, Current, and Aspiration.

Investment Banks

An investment bank is a type of bank that serves as a middleman when large and sophisticated transactions occur in an economy. Examples of these transactions include issuing bonds for a company, stock exchange transactions, mergers, and acquisitions.

In the financial world, investment banks are most recognized for their role as go-betweens between corporations and the financial markets. In other words, they assist firms in issuing shares of stock in an initial public offering (IPO) or an additional stock offering (ASO). They also assist firms in obtaining debt funding by locating large-scale investors for corporate debt securities.

When a company's financial statements are accurate, the investment bank is responsible for releasing a prospectus explaining the offering in detail to investors before the securities are offered for purchase by the public. For example, when Apple wanted to go public, it went to an investment bank, which arranged the initial public offering for them.

Investment banks also serve as financial advisors for large institutions such as pension funds or the U.S. government. The advising section of an investment bank receives a fee for its services. Note that most of these banks also provide commercial banking services; however, they also have their investment banking division.

Some examples of the largest investment banks in the U.S. include:

Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup.

Another critical aspect of an investment bank is its research division. Investment banks include research sections that conduct company reviews and generate assessments on their prospects, which are often accompanied by buy, hold, or sell recommendations. Although this study does not immediately create income, it is beneficial to the company's traders and sales department. The research section also gives investment advice to third-party customers who are able to consummate a deal via the bank's trading desk, resulting in income for the institution.

An investment bank is a type of bank that serves as a middleman when large and sophisticated transactions such as issuing bonds for a company, stock exchange transactions, mergers, and acquisitions happen.

Retail Banks

One of the main types of banks is a retail bank. In the banking industry, retail banking is referred to as "consumer banking" or "personal banking," and it relates to banking that offers financial services to individuals rather than enterprises. Individual customers may manage their money, have access to credit, and deposit their money in a safe and secure environment via the services provided by retail banks.

These banks' main services to consumers include checking and savings accounts, personal loans, credit cards, and certificates of deposit (CDs). It basically has all the benefits you would get from your local bank. This is one of the main goals of many financial services organizations, as it enables them to offer various products to their individual customers and serve as a one-stop shop.

Additionally, retail banking is characterized by having local branch banking services, which involve customer assistance for all of the clients. These services are used by the majority of customers, which helps navigate and ease the process of accessing loans or dealing with personal finance. Financial representatives of the retail banks give customer support and financial advice to customers via the use of local branch sites.

The interest rate retail banks pay on savings accounts is influenced by the federal funds rate. This rate then determines what retail banks calculate as a payout to you on your loan, because they need to make a profit too!

Individuals may get credit through retail banks, which are also key sources of credit. They provide clients with loans for them to acquire large-scale things such as houses and automobiles. Individual consumers usually go to retail banks whenever they need a loan to buy a new car or to create a checking account. Credit may be extended in the form of mortgages, vehicle loans, and credit cards, among other things. The extension of credit is a crucial aspect of the economy because it offers liquidity to the average consumer, which aids in the expansion and growth of the economy.

Retail banks are institutions that offer financial services to individuals rather than enterprises.

Community Development Banks

Community banks are a type of bank that mostly serves small companies and people in a particular geographical region; their size is relatively smaller than other banks.

Community banks tend to place a strong emphasis on building personal ties with their clients. Typically, these smaller banks do not have the product offerings or branch networks that larger financial institutions have, and they frequently provide loans to small businesses and individuals who may not otherwise qualify based on the more standardized and strict criteria used by large financial institutions.

Community banks are a type of bank that mostly serves small companies and people in a particular geographical region

Those in charge of making key decisions at a community bank are more likely to have direct contact with the business leaders and people they serve, which has long been a priority for smaller financial institutions. Community banks are usually more inclined to make loans based on contacts and understanding of the economic needs a particular geographic region might have. On the other hand, large banks may be more prone to depend on standardized measures such as credit ratings.

Types of Banks - Key Takeaways

  • A bank is a type of financial intermediary that creates the funds necessary for the further development of the economy.
  • Many types of banks serve their clients in the U.S. economy including: commercial banks, retail banks, community development banks, investment banks, and online banks.
  • A commercial bank is a type of bank that functions by taking deposits, providing checking account services, advancing loans, and providing basic financial services such as certificates of deposits or savings accounts to people and businesses
  • Online banks are the type of banks that function via the use of the internet.
  • An investment bank is a type of bank that serves as a middleman when large and sophisticated transactions such as issuing bonds for a company, stock exchange transactions, mergers, and acquisitions happen.
  • Retail banks are institutions that offer financial services to individuals rather than enterprises.
  • Community banks are a type of bank that mostly serves small companies and people in a particular geographical region

Frequently Asked Questions about Types of Banks

Retail banks' main services to consumers include checking and savings accounts, personal loans, credit cards, and certificates of deposit (CDs). It basically has all the benefits you would get from your local bank.

Retail banks focus only on serving individual customers.

A commercial bank is a type of bank that has a function in the economy to take deposits, provide checking account services, make loans, and provide basic financial services such as certificates of deposits or savings accounts to people and businesses.

Because all of their activity takes place via the internet.

Some examples of the largest investment banks in the U.S. include Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup.

Final Types of Banks Quiz

Question

What are the functions of retail banks?

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Answer

Retail banks' main services to consumers include checking and savings accounts, personal loans, credit cards, and certificates of deposit (CDs). It basically has all the benefits you would get from your local bank.

Show question

Question

How are commercial banks different from the retail banks?

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Answer

Retail banks focus only on serving individual customers.

Show question

Question

What are the roles of commercial banks?

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Answer

A commercial bank is a type of bank that has a function in the economy to take deposits, provide checking account services, make loans, and provide basic financial services such as certificates of deposits or savings accounts to people and businesses.

Show question

Question

Why are online banks operation different from others?


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Answer

Because all of their activity takes place via the internet.

Show question

Question

What are examples of investment banks in the U.S.?

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Answer

Some examples of the largest investment banks in the U.S. include: 

Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup.

Show question

Question

What is a bank?

Show answer

Answer

A bank is a financial intermediary that plays a vital role in the economy as it creates liquidity necessary for the further development of the economy.

Show question

Question

What are some types of banks in the U.S. economy?

Show answer

Answer

Many types of banks serve their clients in the U.S. economy, including:

commercial banks, retail banks, community development banks, investment banks, and online banks.

Show question

Question

What is a commercial bank?

Show answer

Answer

A commercial bank is a type of bank that has a function in the economy to take deposits, provide checking account services, make loans, and provide basic financial services such as certificates of deposits or savings accounts to people and businesses.

Show question

Question

What is the primary source of income for a commercial bank?

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Answer

Commercial banks' primary sources of income are mortgages, personal loans, and business loans. Banks earn money by charging interest on the money they lend to borrowers. 

Show question

Question

How do commercial banks maximize their profits?

Show answer

Answer

Commercial banks profit by paying lower interest on deposits and charging higher interest on their loans. The higher the difference between these two different interest rates, the higher the profit that the bank takes home.

Show question

Question

Why are commercial banks heavily regulated?

Show answer

Answer

Commercial banks are heavily regulated to prevent them from failing to pay back depositors.

Show question

Question

What are online banks?

Show answer

Answer

Online banks  are the type of banks that function via the use of the internet. They provide similar services to traditional banks, with the main difference being that all the activities in online banks take place through the internet. 

Show question

Question

What is an investment bank?

Show answer

Answer

An investment bank is a type of bank that serves as a middleman when large and sophisticated transactions occur in an economy.

Show question

Question

What are some examples of the financial transactions investment banks facilitate?

Show answer

Answer

Examples of these transactions include: issuing bonds for a company, stock exchange transactions, mergers and acquisitions.

Show question

Question

What is a retail bank?

Show answer

Answer

In the banking industry, retail banking is referred to as "consumer banking" or "personal banking," and it relates to banking that offers financial services to individuals rather than enterprises.

Show question

Question

What are community banks?

Show answer

Answer

Community banks are a type of bank that mostly serves small companies and people in a particular geographical region; their size is relatively smaller than other banks.

Show question

Question

Why are banks considered indispensible?

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Answer

Because they help individuals buy their houses and entrepreneurs establish their startups.

Show question

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How do banks generate loans?

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Answer

By accepting deposits and using parts of these deposits to create loans for their clients.

Show question

Question

Banks are legally obliged to match the depositors' _______ demand.

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Answer

withdrawal

Show question

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Why can't banks lend out all of their deposits?

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Answer

Because they need to keep a portion of it in their reserves in case there are withdrawal demands, and there also existing reserve requirements.

Show question

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Who sets reserve requirements?

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Reserve requirements are part of the monetary policy set by the Federal Reserve.

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What is the Federal Reserve?

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Answer

It is the central bank of the U.S.

Show question

Question

_______ banks are responsible for most financial transactions that take place in the United States.

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Answer

Commercial

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How do banks earn money?

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Answer

By charging interest on the money they lend to borrowers.

Show question

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Commercial banks profit by paying lower interest on ______ and charging higher interest on their _____.

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deposits; loans

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What is not considered a bank account fee?

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Interest on a bank loan

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One of the primary funding sources for a ____ in an early stage is taking out a loan from a bank.

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startup

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One of the main regulatory bodies is the ________ _______ _______ ______.

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Answer

Federal Deposit Insurance Corporation

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What does the FDIC do?

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It ensures that funds are returned to depositors if a bank fails.

Show question

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A financial intermediary that plays a vital role in the economy as it creates the funds necessary for the economy.

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Answer

banks

Show question

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Which institution sets the reserve requirement for banks?

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Answer

The Fed

Show question

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True or False: The reserve requirement is set by neighboring banks.

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Answer

False

Show question

Question

A type of bank that has a function in the economy to take deposits, provide checking account services, make loans, and provide basic financial services such as certificates of deposits or savings accounts to people and businesses.

Show answer

Answer

commercial bank

Show question

Question

Which bank is responsible for most financial transactions that take place in the United States? 


Show answer

Answer

commercial banks

Show question

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Which institution ensures that depositors can their funds even if the bank fails?

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FDIC

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Banks that function via the use of the internet.


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online banks

Show question

Question

True or False: Almost all financial institutions offer some internet banking,

Show answer

Answer

True

Show question

Question

A new form of banking that merges information technologies and conventional banking.

Show answer

Answer

Neobanks

Show question

Question

A type of bank that serves as a middleman when large and sophisticated transactions occur in an economy


Show answer

Answer

investment bank

Show question

Question

Examples of this type of bank's transactions are: bonds, mergers, stock exchange transactions, and acquisitions. 

Show answer

Answer

investment banks

Show question

Question

Which type of bank also serves as financial advisors for large institutions such as pension funds or the U.S. government

Show answer

Answer

investment banks

Show question

Question

Institutions that offer financial services to individuals rather than enterprises.


Show answer

Answer

retail bank

Show question

Question

A type of bank that mostly serves small companies and people in a particular geographical region


Show answer

Answer

commercial banks

Show question

Question

True or False: Community banks tend to place a strong emphasis on building personal ties with their clients.

Show answer

Answer

True

Show question

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True or False: The interest rate retail banks pay on savings accounts is influenced by the federal funds rate.

Show answer

Answer

True

Show question

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True or False: Investment banks include research sections that conduct company reviews and generate assessments on their prospects, which are often accompanied by buy, hold, or sell recommendations.

Show answer

Answer

True

Show question

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True or False: In the financial world, investment banks are most recognized for their role as go-betweens between corporations and the forex markets. 


Show answer

Answer

False

Show question

Question

True or False: Investment banks also serve as financial advisors for large institutions such as pension funds or the U.S. government.

Show answer

Answer

True

Show question

Question

True or False: Retail banking is a new form of banking that merges information technologies and conventional banking.

Show answer

Answer

False


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