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Banking institutions include commercial banks, savings and loan associations (SLAs), savings banks, and credit unions. The major differences between these types of banks involve how they are owned and how they manage their assets and liabilities. Assets of banks are typically cash, loans, securities (bonds, but not stocks), and property in which the bank has invested. Liabilities are primarily the deposits received from the bank’s customers. They are known as liabilities because they are still owned by, and can be withdrawn by, the depositors of the financial institution.

Until the early 1980s, the assets and liabilities of banks were tightly regulated. As a result, clear distinctions existed between the activities and types of services offered by these different types of banks. Although subsequent deregulation in the 1990s blurred these distinctions, differences do remain.

A Commercial Banks

Commercial banks are so named because they specialize in loans to commercial and industrial businesses. Commercial banks are owned by private investors, called stockholders, or by companies called bank holding companies. The vast majority of commercial banks are owned by bank holding companies. (A holding company is a corporation that exists only to hold shares in another company.) In 1984, 62 per cent of banks were owned by holding companies. In 2000, 76 per cent of banks were owned by holding companies. The bank holding company form of ownership became increasingly attractive for several reasons. First, holding companies could engage in activities not permitted in the bank itself—for example, offering investment advice, underwriting securities, and engaging in other investment banking activities. But these activities were permitted in the bank if the holding company owned separate companies that offer these services. Using the holding company form of organization, bankers could then diversify their product lines and offer services requested by their customers and provided by their European counterparts. Second, many states had laws that restricted a bank from opening branches to within a certain number of miles from the bank’s main branch. By setting up a holding company, a banking firm could locate new banks around the state and therefore put branches in locations not previously available.

Commercial banks are “for profit” organizations. Their objective is to make a profit. The profits either can be paid out to bank stockholders or to the holding company in the form of dividends, or the profits can be retained to build capital (net worth). Commercial banks traditionally have the broadest variety of assets and liabilities. Their historical specialities have been commercial lending to businesses on the asset side and checking accounts for businesses and individuals on the liability side. However, commercial banks also make consumer loans for automobiles and other consumer goods as well as real estate (mortgage) loans for both consumers and businesses.

B Savings and Loan Associations

Savings and loan associations (SLAs) are usually owned by stockholders, but they can be owned by depositors as well. (If owned by depositors, they are called “mutuals.”) If stock owned, the goal is to earn a profit that can either be paid out as a dividend or retained to increase capital. If owned by depositors, the objective is to earn a profit that can be used either to build capital or lower future loan rates or to raise future deposit rates for the depositor-owners. Until the early 1980s, regulations restricted SLAs to investing in real estate mortgage loans and accepting savings accounts and time deposits (savings accounts that exist for a specified period of time). As a result, historically SLAs have specialized in savings deposits and mortgage lending.

C Savings Banks

Traditional savings banks, also known as mutual savings banks (MSBs), have no stockholders, and their assets are administered for the sole benefit of depositors. Earnings are paid to depositors after expenses are met and reserves are set aside to ensure the deposits. During the 1980s savings banks were in a great state of flux, and many began to provide the same kinds of services as commercial banks.

Since 1982 savings banks have been permitted to convert to SLAs. SLAs also may convert to savings banks. Both SLAs and MSBs can now offer a full range of financial services, including multiple savings instruments; checking accounts; consumer, commercial, and agricultural loans; and trust and credit card services. See also Savings Institutions.

D Credit Unions

Credit unions are not-for-profit, cooperative organizations that are owned by their members. Their goal is to minimize the rate members pay on loans and maximize the rate paid to members on deposits. Whatever surplus is earned is retained to build the capital of the credit union. Members must share a common bond. That bond is typically employment (members all work for the same employers) or geography (members all live in the same geographic area). Historically, credit unions specialized in providing automobile and other personal loans and savings deposits for their members. However, more recently credit unions have offered mortgage loans, credit card loans, and some commercial loans in addition to checking accounts and time deposits.

Credit unions, SLAs, and savings banks help encourage thriftiness by paying interest to consumers who put their money in savings deposits. Consequently, credit unions, SLAs, and savings banks are often referred to as thrift institutions.

Of the various types of banks in the United States, commercial banks account for the greatest single source of the financial industry’s assets. In 2000 the 8,528 commercial banks in the United States controlled 24 per cent of the financial industry’s total assets. Commercial banks, however, have seen their share of financial-industry assets erode over time, as more money has shifted to the money market and other mutual funds. In the mid-1990s, for example, the approximately 11,000 commercial banks then in existence controlled 27 per cent of assets. In 1950 they controlled nearly 50 per cent of financial assets. Savings institutions’ share of financial assets has also dropped from roughly 13 per cent in 1950 to 5 per cent in 2000. Credit unions’ share has remained fairly constant at 2 per cent.

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