Forms of Commercial Banks
The Fed, represented by 12 regional United States Federal Reserve Banks, regulates commercial banks and to some extent the amount of currency available in the United States economy. Commercial banks have fiduciary duty to depositors. Commercial banks act as trustee with a duty to the principal account holder to accept instruments, pay on them and collect payments on debt. Credit unions and savings and loan associations are financial service institutions not forms of commercial banks.
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Holding Companies
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Commercial banks are usually owned and operated by holding companies. Banks without holding companies are at a disadvantage because holding companies raise capital. Banks with branches in more than one state represent a holding company. Banks compete as subsidiaries of their holding company. Holding companies levy funds in transactions that the Fed prohibits commercial banks from participating in. Multi-bank holding companies reduce the costs of advertising, bookkeeping and financial reporting.
Commercial Banks
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Commercial banks maintain and pay interest on deposits from customers. Funds deposited in commercial banks are insured by the Federal Deposit Insurance Corporation. The Federal Reserve sets the amount of deposits that banks must maintain in the federal reserve. Commercial banks can lend any money held in excess of the required amount. Commercial banks can make loans to buy cars, purchase homes or increase business inventory, but commercial banks are conservative with most lending secured by collateral. Though commercial banks derive revenue from these services, investment banking is prohibited as a regulated service of commercial banks. Small businesses do not receive start-up funds from commercial banks.
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Electronic Banks
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Electronic fund transfer, EFT, uses electronic technology instead of checks and other paper instruments. Electronic fund transfers and automated teller machines reduced human labor traditionally part of finance organizations. Computerized home-banking reduced the role of commercial banks in personal finance, but electronic banks facilitate national and global banking. Personal Identification Numbers, PINs, replaced the customer's signature in commercial transactions. Electronic banking made it possible to bank any time of the day or night. Direct electronic deposits and automatic bill-pay options increased confidentiality, reduced cost and gave the customer new freedom. The Uniform Commercial Code gives the customer 60 days to notify an electronic institution if an error occurs. Commercial banks have no obligation to investigate mistakes more than 60 days old.
Financial Service Institutions
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The savvy small business owner considers accessibility, loan approval processes, compatibility of services offered and processing fees when choosing a bank. United States Legal explains that local community banks are the best source of loans and lines of credit for small businesses because they know their local business and their customers personally. The bank refers small business owners with positive banking relationships to professional opportunities, programs, workshops and investors. Small businesses require special services offered by commercial banks. Trust companies manage and transfer asset ownership and money between parties through a trustee. Insurance and pension funds are not services offered by commercial banks.
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References
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