The
Banking Firm Theory
I-
The Bank:
a special firm
II-
Types of banks
I-
The Bank: a special firm
Banking is one of the oldest trades in the world and from the
start it had an international vocation calling (exchange, financing
of international trade). It is a company like others, its behaviour
and strategy can be analysed with the same relevant structures
and analysis tools than any other company. However, banking
is special and the consequences of this uniqueness have always
been significant.
II- Types of banks
-The International Bank
International banks offer the entire range of banking services,
with non-banking financial services, under only one corporate
body. Besides, there are direct links between banking and commercial
activities by means of the holding of shares and the sharing
of the managing mandates of banks and of commercial companies.
Normally, financial activities are the following:
• Financial intermediation and liquid assets by the means
of deposits and loans, the payment system is a by-product.
• Definitions and availabilities of financial tools for
traders (for example, bond issues, shares, currencies) and by-products.
• Registered trademark business.
• Commission for selling and buying shares.
• Assistance to decision making services and assistance
for implementation concerning the merger and acquisition of
firms.
• Investment management.
• Insurances.
- Commercial and investment banks
Commercial banks are not allowed to subscribe guaranteed stocks
except for municipal bonds and private investments. Investment
banks are forbidden to provide banking services.
The goals of the law were: to minimize the collusions between
establishments in the banking sector and to defuse possible
new financial crises like the one that occurred between 1930
and 1933.
Modern investment banks promise to extend a series of activities:
• Raising funds for major firms and the government.
• Subscription.
• Sorting out mergers and acquisitions of firms.
• Transaction - shares, bonds, registered trademark.
• Funds management.
• Advice.
• Global management.
- The central bank
The function of the central bank, like the Bank of France, is
to regulate and supervise the transactions of the different
banks, by making sure in particular of their solvency toward
the depositors, and more particularly it has to supervise the
production of currencies by these banks, and to regulate their
use thanks to prime rates. The economic theory sees in it a
way to regulate the growth through savings incentive or consumption,
and to have an effect on the inflation.
- The business bank
A generalist merchant named Francis Baring lived in Great Britain
in 1762. He created the first business bank by gaining interest
in the funding of import and export of goods by small firms.
These banks have also been known as “acceptance houses”
– term used until 1980. Then, they extended their activities
to the supply of loans to monarchs and governments, the subscription
of guarantees, advice and the organization of mergers and acquisitions
of firms. They are destined to medium and large firms.
- Investment banks
Investment banks act as intermediaries when they offer services
such as the subscription of guarantees, advice on mergers and
acquisitions, trade, the management of assets and global holding.
However, it is another form of financial intermediation. Investment
banks do not provide liquid assets as a service like a common
bank. They contribute to increase liquid assets in the system
by organizing new ways of funding for a firm, but it is totally
different from the gathering of liquid assets demanded by depositors.
Indeed, the functions of investment banks differ so much from
the ones of traditional banks that the « US National Association
of Securities Dealers » has not officially acknowledged
the expression « investment bank » and uses «broker
dealer» instead to describe investment banks and real
estate companies. However, several investment banks and real
estate companies offer a traditional deposit service, bank cheques,
bank automatic tellers and loan facilities to the wealthiest
people.
In the United States, a conflict of interest has been created
by the 1933 Banking Act, best-known as the Glass-Steagall Act,
between the activities of:
• Commercial bank, which receives deposits and make loans.
• Investment bank, which makes the transactions on stocks
and real estate prices.
