What is the Banking System?

10 Types of
Banking Systems Explained
June 23, 2020 by Umar Farooq

Whenever a large number of entities or corporations join together and make up a

system is known as the banking system. They carry out their specific job of raising
funds and lending resources in the economic and financial markets.

The main purpose and explanation of the existence of this sector is the need for
certain organizations to be in charge of carrying out financial inter-mediation
operations. In this way, it is possible that the money moves from one place to
another adjusting to certain risks and deadlines that mark the financial reality.

The bank is responsible for its own activity and nature to obtain economic and
financial resources through a multitude of instruments created for such purposes,
such as bonds, deposits, or obligations.

Alternatively, this system of entities is responsible for facilitating the access of its
clients to these resources through banking tools such as loans and mortgages, in
exchange for interest or commissions previously agreed upon in each operation.

In that sense, at a basic level of study, it can be defined that the interest collected is
the profit of the bank, which at the same time faces a series of costs derived from
the interests that in turn this one pays to its own creditors. The difference between
both variables is known as the profit or margin of a bank, to give a simple example.

The evolution of the concept of banking has been developing throughout history,
being present its nature in the different civilizations from ancient Egypt especially.
However, the emergence of currency as a means of payment was the rapid
evolution of the banking business, which reached its formal establishment in the
modern age and the Renaissance.

Types of Banking Systems

The set of existing banks in the economic system conforms to the banking or
banking system. Having said all this, there are different types of banks attending to
the sector to which this entity is directed and the size of its action. Below are five
different types of banking systems, which are commonly used nowadays in all over
the world.

Private Banking
Private banking is a highly professionalized and global management of a client’s
assets. It seeks to meet the investment, wealth, financial and tax planning needs of
individuals or family groups with high equity. Private banking is therefore dedicated
to financial advisory and asset management.

For this, many variables are taken into account, for which it is essential to make a
good profile of the client:

 Risk profile.
 Objectives of profitability.
 Liquidity needs.
 Temporal horizon.
 Fiscal situation.

For a private banking service to be as such there must be a bank-client relationship

that stands out for offering a personalized service. It is necessary to distinguish
between customer banking and product banking:

Customer Banking: focuses on making profitable the relationship with the

customer, seeing it as a whole and not as a sum of products and services.

Product Banking: The placement of products is not based on the client, but on the
commercial campaigns, not taking into account the personalized service.

There are several ways to structure a Private Banking service: American style

(private banking from investment banking), more focused on the corporate client
from wholesale banking, and the Swiss-Spanish style: Private Banking plus
patrimonialism, overturned in that A high-quality client who seeks above all quality
of life and control over his assets, which he wants to keep away from taxes,
inflation, investment costs, and invests in conservative products.

Main Features of Private Banking

It satisfies the global needs of the client’s heritage through:

 Patrimonial, financial and fiscal planning.

 Intergenerational orientation.
 Individualized management.
 The best and most complete range of products and services.
 Based on a strong interpersonal relationship with the client.
 Main Private Banking Services

The range of services in private banking is very varied:

 Family office services.

 Investment in real estate assets.
 Availability of a wide range of mutual funds.
 SICAV and structured products.
  Management of movable and non-movable assets.
 Tax optimization of the estate.
 Intergenerational planning.

Home Banking System 

It is called home banking to all those resources, tools and provisions aimed at
bringing banking services as close to the customer as possible. Within this, we can
find several types of banking services depending on the route of communication.

Thus, online banking, through telemetric means, telephone banking, through the
telephone to perform various operations and checks, digital banking, which is a
broader term that collects all of the above, through digital applications.

In general, home banking is a broad concept that consists of carrying to all corners
the possibility of carrying out transactions; transactions of any kind as far as banking
services are concerned.

Evolution of home Banking

The term home banking began to be used in the late 1990s when opportunities
arose to be able to perform any management beyond the physical headquarters of
any banking office and a broader time than this.

In recent years, all banks have made improvements and adaptations to start online
banking or banking, so that today it is possible to carry out any type of operation
through various methods without having to go to a bank office.

This sectorization has led to the emergence of purely digital banks, through
telematic means, without physical banking offices, or traditional banks have created
sections and banks in parallel with those that operate digitally, so as not to lose
market share.

Today, home banking has stopped being a complement to traditional banking to play
the main role in the operations and consultations of customers, radically
transforming the sector and betting on digital banking, in which some banks see it
as a strategy.

Wholesale Banking System

Wholesale banking is one for large-scale operations, usually with large-sized

enterprises or organizations of great importance. Wholesale banking also called
wholesale banking, corporate banking, or corporate banking.

This is because this type of banking has among its client’s institutions and business
organizations, so they have special and more personal attention than in commercial
banking. Wholesale banking, intended for large volumes of money from major
economic operations can be divided into two segments:
  Investment banking: financial structures, mergers and acquisitions (M & A),
advice, etc.
 Corporate Banking: Management of liabilities (lines of credit, factoring or
confirming), management of fixed assets (loans, leasing, renting, etc.).

While commercial banking is aimed at small savers and investors, wholesale banking
has fixed its market in those customers who, because of their volume, operations
and size, need a more direct and private channel than the rest. This type of bank
has a smaller number of operations but a greater number of operations, such as the
issuance of debt, loans, custom financing, sale of corporate bonds and above all,
investment banking of large patrimonies.

The Model of Wholesale Banking

The model of wholesale banking can be found in two ways:

 Commercial and private line: in this case, the bank proposes a single manager
to operate for the organization that gives him the right to negotiate and
process savings and financing privately. This line of business is employed by
large quoted companies or large volume operations.
 General line: even outside the commercial or retail banking, several
organizations have private but common assistance to several business units.

In general, wholesale banking has a fundamental role in managing the flow of

finance and investment of large organizations, since they have highly-specialized and
large accounts oriented personnel, in operations that cannot be supplied by
commercial banks, So that they have several institutional agents of financing and
investment and act as intermediaries between them.

Mixed Banking System

It is called mixed banking to the one that operates in the commercial bank or the
consumer, as well as in the wholesale or industrial banking and also the one that is
in public and private capital.

Initially, banking has been divided between retail and commercial banking, industrial
or corporate banking, and particularly investment or corporate banking, dedicated to
large companies and large-scale operations.

Until recent times, banking was well defined and dedicated to its previously defined
sector, however, with the expansion and empowerment of banks, traditional retail
banking began to operate with products dedicated to small and medium-sized
enterprises and to finance operations of large companies, while industrial or
business banking was opening up to the traditional consumer sector as a way of
diversifying its market and offset the loss of weight of the industrial sector in the
economy as a whole.
Mixed Banking as an Entity whose Capital is made up of state
Contributions and Private Capital

At the same time, the term mixed banking also refers to that bank whose capital is
composed of public and private resources. The public banking has always been an
instrument of states to regulate a certain extent and operate your criteria in the
banking market, especially before deregulation and opening of the 80s and ’90s of
the twentieth century.

Over time, as the liberalization of the sector has been increasing, public banks have
been absorbed by traditional private banking, except in some cases where only part
of the capital has been sold, either with a majority or minority of the public sector,
but were, in any case, it had room for action and direction.

In this sense, mixed or semi-public banks have been the main sponsors of financing
lines to SMEs and entrepreneurs, opting for greater ease in financing and a greater
margin of return, thus showing its initial principles.

Fractional Reserve Banking

Fractional reserve banking is a banking system in which banks hold a fraction of

their clients’ deposits in reserves. This fraction is known as the cash ratio. Under a
fractional reserve banking system, banks are not required to maintain 100% of their
customers’ deposits in their reserves.

In this way, they can lend the part of the deposits that they are not obliged to keep
in reserves, which allows them to obtain benefits and remunerate the deposits. This
system is based on the assumption that depositors will never withdraw all their
money at the same time.

Fractional reserve banking allows a phenomenon called a bank multiplier to occur.

The bank multiplier is the expansion effect of the amount of money that occurs
when a bank receives a deposit and only maintains a fraction in reserve, lending the
rest.

By lending money deposited, the bank allows two people at a time to have the same
money. This process is repeated when the loan recipient deposits their money into a
bank. This is why the monetary base does not coincide with the monetary
aggregates (M1, M2, M3 …).

Implications of Fractional Reserve Banking

The fractional reserve implies that banks are in constant risk of insolvency since they
cannot cope with a massive withdrawal of deposits. When this situation of massive
withdrawal of funds occurs, there is a so-called banking panic. To mitigate this
constant risk, the fractional reserve system usually has a lender of last resort.
This lender is in charge of injecting liquidity to the banks in complicated situations to
avoid the banking panics. In most cases, the lender of the last resort is the state
through the central bank. It is the same central bank that sets what percentage of
deposits a bank should hold in its reserves.

This percentage is called the cash reserve ratio and is one of the mechanisms of the
monetary policy of central banks available.

What Bank awaits us in the Future?

The technological revolution is affecting all sectors transformed all kinds of
industries. That is why in this digital age, more and more people are talking about
the future of banking and its transformation into electronic banking, a sector that
has very valuable raw material; customer data.

Banking is usually protected by customer trust since citizens need that confidence to
deposit their savings, create investment plans, or simply domicile their payrolls or
pensions. If future banking was based 100% on the Internet, what would happen to
the trust of the customers?

The bank is the center of our personal finances and we all need a bank account,
credit, or debit card. If these efforts are transformed and are being digitally started,
it can create distrust in those citizens who are not supporters or are not familiar with
this digital age.

Banking workers are an influential factor in clients who come to banks, so if

technological changes affect employees, who will take care of the personalized
relationship with the customer? , Who will try to reassure or help the client with his
efforts? If the future of banking is based on a technological transformation, the
banking sector should adopt this change to the needs of its clients:

 Mobile banking users are increasing year by year, there are more and more
people choosing mobile banking to check their finances, but the bank could
provide more information about this channel to those who do not know the
features of mobile banking. The operations that can be carried out through
this medium and from any place, without having to go to a bank branch.
 More specialized workers to provide more specific information on the
technological advances of banking. If this change leads to the disappearance
of offices and therefore of jobs, there should continue to be employees who
are available to provide the information needed to solve customer issues and
have more detailed information on banking products or services.
 Reinforce cybersecurity and communicate the measures they take to protect
customer data in electronic banking. This is the main disadvantage caused by
the distrust of the client in this type of banking because no one wants their
private data to become public and affect their intimate life.
Lesson Transcript
Instructor: Brianna Whiting
Brianna has a masters of education in educational leadership, a DBA business management, and a BS in
animal science.

Cite this lesson

Banks are a huge part of our lives. In this lesson, we will explore the banking system. We will
learn about different types of banks as well as how they each function.

What Is a Banking System?

When you sit back and think about it, banks are often a huge part of our lives. We deposit our
paychecks, take out loans, and set up savings accounts, all at a bank. But what do banks do?
What are the different types of banks? Let's start finding some answers to these questions by
looking at the different types of banks that make up a banking system.
A banking system is a group or network of institutions that provide financial services for us.
These institutions are responsible for operating a payment system, providing loans, taking
deposits, and helping with investments.

Functions
Banking systems perform several different functions, depending on the network of institutions.
For example, payment and loan functions at commercial banks allow us to deposit funds and use
our checking accounts and debit cards to pay our bills or make purchases. They can also help us
finance our cars and homes.
By comparison, central banks or systems distribute currency and establish money-related
policies. Investment banks or systems conduct trades or deal with capital markets.
Many banks are profit-seeking entities with stockholders. They obtain profits by charging more
interest for loans and paying less interest on deposits. For example, a bank may charge a 3.91%
interest rate on a 30-year, fixed rate mortgage, but offer an interest rate of only 0.15% on a
savings account of $100,000.

Types
So, now that we know what a banking system is and how it functions, let's look at four types of
banking systems.

Commercial Banks
Commercial banks, such as community banks, accept deposits and offer business and
consumer loans. At a commercial bank, you can open a checking or savings account, apply for a
car or homeowner loan, transfer money, or pay your bills. Some commercial banks also offer
insurance, investment, and retirement services. While community and commercial banks are
usually chartered by the state in which they do business, some may be insured and overseen by
the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank.

Central and National Banks

The FDIC also insures national banks, which are investing members of the Federal Reserve
System and are chartered by the United States of America. In contrast to a local commercial
bank, they may have branches in major cities and the majority of states. National banks offer the
same services found at a commercial bank, as well as global banking services. At a national
bank, you could also open a money market account or trade bonds and stocks.