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So Many Banks: Do You Know the Difference?
In light of the recent turnaround in the economy, you may be hearing or reading about the different types of banks, such as a retail bank or investment bank. Banks fill various needs. Their diversified services and products are developed to provide clients with the most appropriate assistance to help them make the most of their financial portfolio.
In general, most banks operate profit-making, private enterprises. To make the most educated decision in what type of bank best serves your needs, it's helpful to review their differences. Keep in mind that some banks fill the function of several types of banks. Another issue to keep in mind is that changes can, and do, occur, especially given current events. For instance, the recent shakeup with the nation's largest investment banks has begged the question, is there such a thing as an investment bank anymore? Yes, there are still investment banks - they just look different than they have in recent years.
Following are the most common types of banks and a description of their services:
Retail Bank
Dealing directly with individuals and sometimes businesses, retail banks provide basic banking services, such as checking and savings accounts, mortgages and auto loans, certificate of deposits, and unsecured or revolving loans, such as credit cards, to name a few. These banks have wide access to the general populace with branch offices and automatic teller machines placed strategically throughout the community.
Besides helping individuals, retail banks can also operate as a commercial bank, providing services to businesses as well.
Commercial Bank
Dealing primarily with deposits and loans from small businesses and corporations, the commercial bank features basic accounts such as savings and checking while also lending money to companies for real and capital purchases. Whether dealing directly with businesses or servicing individuals as well, commercial banks are set up in such a way to accommodate larger volumes of credit card payments and cash deposits generated by the professional enterprises. To handle income generated by the customers of a business, the commercial bank also offers transaction processing, foreign exchange and lockbox services.
Investment Bank
Focused on helping companies and organizations raise funds, investment banks issue and sell securities in the capital markets. Typically, they do not accept customer deposits. However, as in other examples, the investment bank can also operate as a commercial and/or retail venture as well. When a business wishes to raise capital, the investment bank assists them in the process of issuing stocks or bonds. They also provide assistance to corporations on mergers and acquisitions, as well as derivatives (such as futures), commodity and equity securities, and underwriting.
Central Bank
In the United States, the Federal Reserve acts as a central bank, or an entity that oversees bank activity. Here, "the Fed" has three main focuses: conduct monetary policy, oversee and regulate financial firms and provide financial services. Created by Congress in 1913 to serve as the nation's central bank, its most important job is to control inflation without tipping the economy into recession. The current chair of the reserve, Ben Bernanke, is watched closely by the press and consumers for clues on how the economy is performing. While most bank clients will never interact with the Federal Reserve directly, the actions of its board affect stock and mutual funds, loan rates and even home values.
Online Banks
Truly a bank of its time, online banks exist today because of the power of the Internet. These banks operate either primarily or exclusively on the Internet. Their services include open and fund accounts, online bill pay, certificate of deposits, and the ability to transfer money between accounts. While the bank operates in cyberspace, clients access their cash in the real world via a debit card. Online banks service both individuals and businesses.
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