Md. Zahidur Rahman, Assistant Professor, DBA, CU.

Organizational Structures of Bank

Unit Banking
Unit banks, one of the oldest kinds, offer all of their services from one office, although some
services (such as taking deposits, cashing checks, or paying bills) may be offered from limited-
service facilities, such as drive-up windows (through which customers are served at a drive-
through facility) and automated teller machines (ATMs) that are linked to the bank’s computer
system. These organizations are still common today.
One reason for the comparatively large number of unit banks is the rapid formation of new
banks, even in an age of electronic banking and megamergers among industry leaders. Many
customers still seem to prefer small banks, which often get to know their customers well.
At a Glance:
 Offer all services from one office
 One of the oldest kinds of banks
 New banks are generally unit banks until it can grow and attract more resources

Branch Banking
Branch Banking offers the full range of services from several locations, including a head office
and one or more full-service branch offices. Such an organization is also likely to offer limited
services through a supporting network of drive-in windows, ATMs, computers networked with
the bank’s computers, point-of-sale terminals in stores and shopping centers, the Internet, and
other advanced communications systems. Senior management of a branching organization is
usually located at the home office, though each full-service branch has its own management team
with limited authority to make decisions on customer loan applications and other facts of daily
operations.
At a Glance:
 Offer full range of services from several locations
 Senior management at the Head Office
 Each branch has its own management team with limited decision making ability
 Some functions are highly centralized, while others are decentralized

Reasons behind the Growth of Branch Banking

The causes of the rapid growth in branching are many. One factor has been the exodus of
population from cities to suburban communities, forcing many large downtown financial firms to
either follow or lose their mobile customers. The result has been the expansion of branch offices
and automated tellers, radiating out from downtown areas of major cities like the spokes of a
wheel. Increased bank failures have also spawned branching activity as healthier institutions
have been allowed to take over sick ones and convert them into branch offices. Business growth,
too, has fueled the spread of branching; the credit needs of rapidly growing corporations
Md. Zahidur Rahman, Assistant Professor, DBA, CU.

necessitate larger and more diversified lending institutions that can reach into many local
markets for small deposit accounts and pool those funds into large-volume loans.
At a Glance:
 Exodus of population to suburban communities
 Increased bank failures in recent years
 Business growth
 Credit needs of rapidly growing corporations

Advantages and Disadvantages of Branch Banking

Branching organizations often buy out smaller institutions, converting them into branches and
concentrating the industry’s assets into the hands of fewer firms. However, there is little or no
evidence that this necessarily lessens competition. Customer convenience seems to improve
because more services are available at every branch location and branching areas tend to have
more offices per unit of population, reducing transactions costs for the average customer.
However, some service fees seem to be higher in branching areas, which may reflect greater
knowledge on the part of larger banks concerning the true cost of each service.
Electronic Branching—Web Sites and Electronic Networks: An Alternative or a
Supplement to Traditional Bank Branch Offices?
Banks have been offering Internet banking services, automated teller machines (ATMs) and
ATM networks dispensing cash and accepting deposits, point-of-sale (POS) terminals in stores
and shopping centers to facilitate payment for goods and services. Through telephone and
computer-based systems customers can check account balances, set up new accounts, move
funds between accounts, pay bills, request loans, and invest spare funds any hour of the day or
night. Moreover, if you happen to be the holder of an electronic account, you do not necessarily
have to change financial-service institutions when you move.
Virtual Banks
These Banks provide their services exclusively through the Web—are moving today to pass
these Web-generated cost savings along to their customers and gain a market advantage over
depository institutions still relying heavily on neighborhood brick-and-mortar branch offices.
However, despite significantly lower transactions costs, virtual banking firms have not yet
demonstrated they can be consistently profitable. Indeed, Net Bank Inc., the first Internet-only
savings and loan association, launched during the 1990s, failed in 2007 with assets of $2.5
billion due to troubled loans and inability to offer strong bank–customer relationships.
At a Glance:
 Provide their services exclusively through the web
 Can generate cost savings over Traditional Brick-and-Mortar Banks
 Have not yet demonstrated that they can be consistently profitable
Md. Zahidur Rahman, Assistant Professor, DBA, CU.

Holding Company Organizations

A bank holding company is simply a corporation chartered for the purpose of holding the stock
(equity shares) of at least one bank, often along with other businesses. Many holding companies
hold only a small minority of the outstanding shares of one or more banks, thereby escaping
government regulation. However, if a holding company seeks to control a U.S. bank, it must seek
approval from the Federal Reserve Board to become a registered bank holding company. Under
the terms of the Bank Holding Company Act, control is assumed to exist if the holding company
acquires 25 percent or more of the outstanding equity shares of at least one bank or can elect at
least two directors of at least one bank.
At a Glance:
 A corporation chartered for the purpose of holding the stock of at least one bank
 Control of a bank is assumed when 25% or more of the stock is owned
 Must get Approval from Federal Reserve Board to control a bank
 One-Bank Holding Companies vs. Multibank Holding Companies

Why Holding Companies Have Grown

The principal reasons for this rapid upsurge in holding company activity include their
 Greater access to capital markets in raising funds,
 Ability to use higher leverage (more debt capital relative to equity capital) than
nonaffiliated financial firms,
 Tax advantages in being able to offset profits from one business with losses generated by
other firms part of the same company, and
 Ability to expand into businesses outside banking.
One-Bank Holding Companies
The one-bank holding company is a corporation that owns at least one-quarter of the voting
stock of a commercial bank. A bank holding company does not offer any banking services. It
owns and controls a bank.
At a Glance:
 Most registered bank holding companies in the United States are one-bank companies.
By the beginning of the 21st century, about 5,000 of the roughly 5,800 bank holding
companies in the United States controlled stock in just one bank.
 However, these one-bank companies frequently control one or more nonbank businesses
as well.
 Once a holding company registers with the Federal Reserve Board, any non-bank
business activities it starts or acquires must first be approved by the Fed.
 These nonbank businesses must offer services “closely related to banking” that also yield
“public benefits,” such as improved availability of financial services or lower service
prices.
Md. Zahidur Rahman, Assistant Professor, DBA, CU.

Advantages:
 The principal advantage for holding companies entering nonbank lines of business is the
prospect of diversifying sources of revenue and profits (and, therefore, reducing risk
exposure).
 The holding company permits the legal separation between banks and nonbank
businesses having greater risk, allowing these different firms to be owned by the same
group of stockholders.
Multibank Holding Companies
A multibank holding company is a parent company that owns or controls two or
more commercial banks. Because of their conglomerate status, they are subject to more
regulations and oversight than standalone banks, but at the same time also have more options for
raising capital due to their larger size and greater diversity.
Multibank companies number just under 900 but control close to 70 percent of the total assets of
all U.S. banking organizations.
At a Glance:
 Multibank holding companies control stock of more than one bank
 Banks acquired by holding companies are referred to as affiliated banks
 Banks that are not owned by holding companies are known as independent bank
Advantages:
 Promote greater efficiency in banking by increasing a banking firm’s size and by adding
to competitive rivalry in the industry
 Strengthen individual banks against failure
 Offer the public more services more conveniently than independent banks
 More profitable than banking organizations that do not form holding companies
Disadvantages:
 Reduce or eliminate competition between banks
 Overcharging the customers
 Being indifferent to local community needs
 Take excessive risks