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Classification Of Banking Institutions
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The Origin And Functions Of Money
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Classification Of Banking Institutions

Banks differ from one another chiefly in the nature and degree of
their specialization, in legal status, and in the place they occupy in
the system to which they belong. Some banks devote the major portion
of their effort to the conduct of exchanges and are called
commercial banks, others to investment banking and are called
investment banks. The most common subclasses under the latter head
are savings banks, land or mortgage banks, and bond houses. Savings
banks specialize in the collection and investment of small savings;
land banks are primarily intermediaries between capitalists and people
who wish to invest capital in land, building operations, and
agriculture; and bond houses are intermediaries between capitalists
and those who wish to invest capital in industrial, commercial, and
transportation enterprises, or loan it to states, cities, or other
public corporations.

Commercial banks rarely confine themselves exclusively to the conduct
of exchanges. Most of them also conduct savings departments and invest
the funds intrusted to them through such departments in agricultural,
industrial, or commercial enterprises or loan them to public
corporations. Commercial banking, however, is their main concern,
their other departments being side issues of greater or less
importance according to circumstances. Investment banks also
frequently carry on commercial banking as a side issue. These two
lines of business are sometimes mixed in such proportions as to render
classification difficult.

From a legal point of view the banks of nearly all countries may be
classified as private or unincorporated, and incorporated,
sometimes also called joint-stock banks. Private banks are started by
individuals or firms, like any other private enterprise, without the
formality of application for permission to some public officer, and
without compliance with a set of legally prescribed regulations. They
are subject to the laws of the country governing all kinds of private
business enterprises and sometimes to special laws applying
specifically to them. In some of the states of the United States such
banks are prohibited by law.

Incorporated banks are usually started by private initiative but owe
their actual legal existence and status to a special law, to the
requirements of which they must conform before they are permitted to
do business. Their right to do business is usually evidenced by a
document known as a charter, executed and delivered by a public
officer legally endowed with the requisite authority, or passed in the
form of a law by the legislative organs of the state. Charters of the
latter kind are known as special charters and are rarely used
nowadays, except in the case of institutions of a peculiar character,
endowed with special functions. The central banks of Europe owe their
existence to such charters, as did also the first and second United
States banks. In the early history of the United States special
charters were uniformly employed by the states, but for many years
general incorporation laws have been the rule, on compliance with the
requirements of which persons who desire to incorporate banks can
secure charters.

In federal states, both the federal government and the governments of
the constituent states frequently have and exercise the right to
incorporate banks. In the United States, banks incorporated by the
federal government under the terms of a general law, originally passed
in 1863 and many times amended since that date, are known as
national banks, and those incorporated by the states under the
terms of general banking acts or of general incorporation laws are
known as state banks. These latter are endowed with privileges which
enable them to exercise commercial and some investment banking
functions. Other banks also are incorporated by our states under the
terms of general laws, which are known as savings banks and trust
companies. The former, as the name implies, are institutions primarily
designed for the encouragement, collection, and investment of savings.
The latter are called trust companies because the earliest
institutions of this type made the execution of trusts of various
kinds their exclusive business. Banking functions were later added and
in many cases have now assumed chief importance.

The nature of the banking business requires some kind of organization
of the individual institutions in which certain ones will assume to a
degree at least the role of bankers' banks. In most European countries
this position is occupied by single institutions specially chartered
and endowed with special privileges and usually described as central
banks. Examples are the Bank of England in England, the Bank of France
in France, and the Imperial Bank of Germany in Germany. Around these
are grouped the other institutions in a kind of hierarchy, certain
large banks in the larger cities forming centers about which smaller
institutions group themselves. In the United States there is no single
central institution, but a small group of banks in New York City are
the real centers of the system. Around these are grouped the banks in
the other large cities of the country and these in turn perform
important services for banks in the surrounding smaller towns and
country districts.

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