Bank models & prudential requirements
After studying this text the learner should / should be able to:
• Elucidate the models of banking.
• Expound on the rationale, objectives and principles of regulation.
• Discuss the particulars of banking prudential requirements.
The previous section covered risk in banking. The prudential requirements (capital, liquid assets, cash reserves, large exposures, etc.) for banks are founded on risk. There are different models or styles of banking, and each has a particular risk profile. Where there is no de jure differentiation between banks with different risk profiles, the prudential requirements are the same. Where de jure differentiation exists, the prudential requirements differ.
This section first covers the prudential requirements, but this section is preceded by a discussion on the rationale, objectives and principles of regulation. This in turn is preceded by the banking models. Thus, this section is arranged as follows:
• Bank models.
• Rationale, objectives and principles of regulation.
• Prudential requirements.
The purpose of this section is to shed some light on the banking specializations that exist. It should be kept in mind that few banks specialise in only one area. The banking specializations are as follows:
• Commercial banks.
• Mutual banks / building societies.
• Merchant and investment banks.
• Trading banks.
• Private banks.
• Islamic banks.
• Development banks.
• Micro-credit banks.
• Co-operative banks.
• Dedicated banks.
• Discount houses.
Commercial banks are the "norm" banks. The name originates in the group of banks that were members of the clearing house system, i.e. the banks which brought into being the payments system, and organized interbank payments amongst them (via the central bank, which is part of the payments system). They were also the only banks that offered current / cheque account banking. This group endures to this day, although cheque payments are being replaced by EFTs (such as internet banking). It must be added that banks which are not members of the clearing system are also able to offer EFTs.
Commercial banks are also called high street banks. They are the banks that provide all services the public associates with banking, such as ATM withdrawals / deposits, cheque / current and accounts, other deposit accounts, overdraft facilities, mortgage advances, leasing, installment credit advances, and so on. Examples are HSBC, Barclays, Royal Bank of Scotland, UBS. The products of these banks are confusing to the public. In essence, these banks:
• Take deposits and loans (interbank) = liabilities.
• Make loans (MD and NMD) (and hold shares to a small degree) and hold central bank money (N&C and reserves).
• In the case of MD, they make markets, and hold MD portfolios for this purpose and for opportunistic profits.
• Make markets in, and hold for this purpose and for opportunistic profits, foreign exchange.
• Make markets in, and hold for this purpose and for opportunistic profits, derivative contracts.
• Organize, and make possible, payments (cheques, ETFs).
These are the "norm" banks, in the sense that the banking statute, the main thrust of which is the prudential requirements (capital, liquid assets, reserves, concentration of loans, etc.), are directed at them. As we will see, there are other banks that specialise in certain areas of mainstream banking; the prudential requirements apply equally to them. Then there are specialized banks, and they have dissimilar prudential requirements.