Bank, banking

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    What is a bank?

    A bank is a licensed and regulated financial institution that lends money, accepts deposits and carries out other financial transactions for its clients.

    There are three main types of bank:

    Investment bank

    Investment banks, sometimes called wholesale banks, provide financial services to other financial institutions and corporates, and occasionally to countries.

    A key role is the issuance of securities for a listed company, either through an IPO or a secondary issue, in order to raise capital for expansion. Investment banks also provide loans, often for millions of dollars, to companies that prefer debt as a means to raise capital. This is also known as merchant banking.

    Other tasks include providing investment advice to and broking on behalf of institutional investors and acting as an intermediary where a client is engaged in mergers and acquisitions. Many investment banks have their own trading floor, where their staff traders can buy and sell securities on behalf of their clients. They also manage pension funds and other large investments.

    Investment banks are usually regulated by the central bank of the country in which they operate and/or specific regulatory authority.

    Retail banks

    Retail banks, also called commercial banks or “high street” banks, provide banking services to members of the public.

    Examples of retail banking services:

    • accepting salaries and wages into a current account
    • acting as an intermediary to pay bills through direct debits and standing orders
    • providing cheque books, credit and debit cards
    • providing cash withdrawal facilities
    • managing savings

    Many retail banks also offer a wide range of other financial services to their customers, such as insurance, pension funds, mortgages, overdrafts and broking investments in the stock markets. All these services, plus business loans, are also available to small and medium-sized businesses.

    The regulation applies to retail banks, too. They are usually overseen by the appropriate regulatory authority, but the central bank may still set policy for them.

    For a trader, online brokers are often a better alternative to banks for facilitating trades and investments. The reasons are often lower trading costs and better specialisation and support of trading software.