What are the differences between the different types of banks? Commercial banks; investment banks. We will try to enlighten you on the different types of banks that may exist.
Additionally, commercial banks are known as retail banks. Indeed, we all have our bank account as well as our savings accounts in commercial banks. These are the kind of banks with which the common community is most familiar.
These commercial or retail banks offer banking services to their customers who are either individuals or businesses. These banking services include:
The provision of a bank account with all the services that go with it, such as the provision of means of payment (bank card, checkbook, etc.)
The different credits or loans
Money deposit (savings accounts, etc.)
Among the commercial banks include different types of banks such as the traditional banks.
One can also find deposit-only banks. This type of bank does not offer services other than deposits.
Investment banks deal with corporate finance. These investment banks also support companies on mergers and acquisitions projects. They carry large companies by providing a variety of banking services such as financial and strategic advice.
The investment banks have an activity rooted in the financial markets. They can also take care of fundraising for newly listed companies or manage foreign exchange transactions. These investment banks buy and sell stocks, derivatives or bonds in the financial markets.
In Europe, the central bank is called the European Central Bank (ECB). In the United States, the central bank is called the American Federal Reserve or FED (Federal Reserve System). Most countries are attached to a central bank.
Central banks are organizations that influence the global economy. They are responsible for creating money. For example, the ECB manages the creation of Euros while the FED deals with the creation of dollars.
The central bank also set the rate of the economy. The key rate is the rate at which other banks that depend on this central bank will borrow money. This rate influences all other interest rates, such as mortgage loans, consumer loans, etc.
Investment and commercial banks: what is the main difference?
Banks act as a strong link between individuals and various sectors of the modern economy. This motivates the banking sector to expand its scope of activities and actively develop new, previously uncharacteristic areas.
In the banking sector, for a long period of time, commercial banks have been popular - financial and credit institutions that provide a wide range of services:
Settlement and cash services;
Issuance of plastic cards and implementation of salary projects;
Placement of term deposits and deposits;
Leasing; Factoring, etc.
Modern banks are focused on doing healthy businesses. They are interested in providing financial services that contribute to the efficient operation of clients. In the United States, despite the opportunity to expand the list of operations, most large banking institutions prefer to act as a commercial or investment bank, which ensures the functioning of a mixed banking market.
What makes an investment bank different from a commercial one?
First of all, the fact that licensed investment financial and credit organizations do not perform classical banking operations - credit and deposit. They are focused on raising capital on international financial markets, acting as intermediaries, and providing a number of special services:
Carry out operations with securities - underwriting, raising funds based on the issue of securities, dealer activities, trust management, and investment consulting;
Serves as a broker in the field of securities, currencies, and commodities trading.
Carry out derivative transactions implying the delivery of the underlying asset in the future on the terms that are fixed in the contract;
Market research and analytics;
Provide consulting services in the sale and acquisition of a business;
They carry out a feasibility study of investment projects, which includes an assessment of potential efficiency, development of investment programs, and professional preparation of project documentation.
Over time, financial institutions have reached such a level of development that the instruments with which they traditionally operated became insufficient to meet all the needs of clients. Therefore, they began to combine the functions of investment and commercial banks, which provided access to new products and services.
What if the solution was to create your own bank?
We knew about loans between individuals. Some companies go further to free themselves from traditional monetary circuits, by creating their own bank. Car manufacturers and large distribution groups, Casino for example, have done so. In the end, financial advantages of course, but above all a gain in security, in a context where banks operate in the wake of the crisis without a safety net.
By having its own bank, a company has the possibility of extending credit to its customers without going through a traditional bank. The company is thus no longer subject to the restrictive and costly conditions of bank loans. The company's profits stay in-house and no longer flow into the greedy cogs of the financial system. In short a system in a vacuum where the money is reinvested without intermediaries.
Another undeniable advantage: by having its own bank, a company has an account at the European Central Bank and therefore access to loan rates close to zero.
Finally, and this is symptomatic of the global economic context, a company that has its own bank no longer has to fear the risk of bank failure. There have been precedents in this matter! Holding your own money is a significant advantage for companies whose cash flow reaches to billion.
Are you interested in establishing your own Investment banking firm?
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For a confidential consultation on how to establish your own Investment Bank or Offshore Bank & Capital Trust, please contact: