crisis that started in 2007.
In 2008, in the wake of the collapse of the subprime mortgage market, investment banks Bear Stearns and Lehman Brothers went out of business. Bear Stearns was sold to JPMorgan Chase, and
Lehman Brothers declared bankruptcy. Merrill Lynch, the third largest investment bank in the United States, merged with Bank of America. Two of the remaining major U.S. investment banks, Goldman Sachs and Morgan Stanley, legally converted their operations to those of bank holding companies. This move allowed them to accept deposits and thereby raise funds through customer deposits to support their ongoing operations. It also gave them access to emergency funding from their central bank, which was perhaps more important than their new ability to collect deposits.
This was a monumental change to banking because the investment banking model – which relies on accessing the credit markets daily for financing while being exposed to financial market risks – has been called into question.
In Europe, some large banks, such as Barclays, reduced their investment banking activity, although because they had significant businesses in other areas (such as retail banking) they were better able to survive than those banks that were wholly reliant on investment banking business.
Although the large investment banks in the United States have either converted to banks or collapsed, there are still investment banks remaining in the United States. Many of them are smaller, highly specialized investment banks. They are not as reliant on wholesale funding, and typically focus on providing advice to corporate customers about raising money in the financial markets (e.g., Keefe, Bruyette & Woods).
Many wholesale banks finance international trade and often operate in several countries through representative offices or smaller branches. These banks are known as international, multinational, or global banks. Banks that offer financial services, including insurance, along with the core banking functions are called universal banks. Citibank, Deutsche Bank, HSBC, and BNP Paribas are examples of large universal banks.
1.2.3 Bank Holding Companies
Bank holding companies are companies that own one or more banks but do not conduct banking business themselves. Bank holding companies are primarily a feature of the U.S. banking system where regulators were concerned to limit the ability of banks to engage in nonbanking activity. Bank holding companies could own subsidiaries that, between them, covered the full range of financial service activities, but each individual operating institution engaged in only a limited sector of the financial markets.
When analyzing U.S. banks, it is important to differentiate between the holding company or the operating company. For example, Wells Fargo & Company is a holding company that owns Wells Fargo Bank. It is Wells Fargo Bank that conducts banking business.
There are some large non-U.S. banking groups that operate through a holding company structure, such as HSBC Holdings and Royal Bank of Scotland.
Bank holding companies often raise funding on behalf of their group and then “downstream” it to their operating companies. They are able to service interest on the debt from dividends that are “upstreamed” from the operating companies.
1.2.4 Cooperative Banks
Cooperative banks are owned by their customers and usually have a large branch network that covers small towns and villages as well as larger cities. Their core strength is often lending to and taking deposits from individuals and small businesses.
For most banks, there is a distinction between shareholders, who invest in the bank and who therefore own it, and customers, who do business with the bank but have no ownership rights. In contrast, someone who deposits money with a cooperative bank automatically becomes a shareholder in that cooperative bank. In some cooperative banks, customers who receive loans also become shareholders. Such customers are, in principle, entitled to vote and to control how the local cooperative bank is run. Cooperative banks are structured like a pyramid, with individual customers controlling local cooperatives, these local cooperatives in turn controlling regional organizations, and these regional organizations controlling a national organization that oversees the network as a whole.
Examples of such cooperative banks include Rabobank in the Netherlands, the Nationwide Building Society in the United Kingdom, and the Shinkin cooperative bank network in Japan.
Although cooperative banks usually have strong ties to local communities, many have become very large and in some ways behave just like other banks. Rabobank, in the Netherlands, is one of the biggest banks in the world. The BPCE Group in France works with large companies and offers sophisticated financial products.
Many of the larger cooperative banks have a central entity – still ultimately owned by the members – that manages liquidity and risk for the group as a whole.
1.2.5 Credit Unions
Credit unions are similar to cooperative banks in that they are owned by their customers. However, in practice, credit unions tend to be small, closely connected to their local community, and focused on meeting the needs of low-income groups. Frequently, customers may borrow from a credit union only if they also have a savings account there. Although credit unions are seen all over the world and are an important feature of the financial landscape, there are no credit unions that have the size of, say, Rabobank or that compete in international markets.
An example of a credit union is the Croydon, Merton, and South Sutton Credit Union that operates in an area of southwest London in the United Kingdom.
1.2.6 Micro-finance Institutions
Micro-finance institutions (MFIs) exist to extend small amounts of money to low-income customers, usually in developing countries. The amounts lent can be as little as USD 20, though they can sometimes reach a few thousand dollars. The purpose of these loans is to enable customers to rise out of poverty and become more economically self-reliant, for example by buying materials with which to manufacture simple goods that can then be sold in a local marketplace. MFIs often try to replace unscrupulous lenders that exploit customers and charge exorbitant rates of interest. Much MFI activity is directed to women.
The most famous example of an MFI is Grameen Bank, which was set up in Bangladesh in the 1970s to lend money to poor people in small villages. Grameen has since become a large institution, though it retains its strategy of making small loans to underprivileged, largely rural borrowers.
Micro-finance lending now occupies a central position in economic development programs worldwide, with significant networks in South America, Asia, and sub-Saharan Africa. Some large commercial banks provide funding to MFIs as part of their corporate responsibility programs or even as part of their regular lending programs.
1.2.7 Central Banks
Central banks are the principal monetary authority of a country (or, occasionally, a group of countries) and are crucial to the functioning of all banks, financial markets, and the economy. Central banks manage the amount of money and credit in an economy – usually in an effort to contain inflation rates and/or to foster economic growth. They typically accomplish this through their daily activities of buying and selling government debt, determining and maintaining core interest rates, setting reserve requirement levels, and issuing currency. Some central banks are also charged with maintaining certain foreign exchange rate levels for the home currency. Central banks also arrange payments between banks.
Historically, central banks have usually combined this role as the principal monetary authority with two other roles: oversight of the banking system as a whole (macroprudential supervision)
