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 m
rtgage 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.