This guide introduces readers to the four types of banks and explains the difference between them. We will also look at the various ways that these banks can be organized. Here are some key takeaways about these different types of banks.
This guide will begin by defining the four main types of banks and explaining the difference between them. The four main types of banks we will look at are: central banks, commercial banks, retail banks, and investment banks.
The infographic above succinctly explains what each of these four types of banks does. Now, we’ll move on to look at each of these different types of banks in more detail.
Central banks are banks that oversee all of the other banks in their respective countries.
The role of central banks is to ensure the stability of their country's banking system. Central banks have the critical role of acting as a 'lender of last resort', providing funds to the economy when commercial banks are unable to cover any deficits. This is an essential function that aims to ensure that the nation's financial system remains stable and functional, allowing economic activity to continue without disruption.
A central bank is the key regulator of a nation's monetary and fiscal policy, they are the sole provider of the notes and coins in circulation. Central banks play a critical role in sustaining economic stability by striving to keep inflation at a manageable level.
In the United States, the Federal Reserve is the central bank.
Investment banking is a specialized branch of banking that focuses on providing financial services to governments, corporations, and institutions. It typically performs functions such as underwriting (capital raising) and advising on mergers and acquisitions.
Investment banks play a vital role in the global financial system, acting as a bridge between investors – who have capital to invest in various assets – and corporations that require financing for growth and operations.
Investment banks and the investment banking division (IBD) of a bank are sometimes confused. While full-service investment banks offer a comprehensive range of services, such as underwriting, mergers and acquisitions (M&A), equity research, asset management, sales and trading, commercial banking and retail banking, the IBD of a bank only provides the underwriting and M&A advisory services. When most people refer to investment banking, they are often referring to these two key areas.
To learn more about investment banking, we recommend our guide: Intro To Investment Banking.
A commercial bank is a financial institution that specializes in providing banking products and services to businesses and organizations. Commercial banks accept and manage deposits from their customers. These institutions offer a broad range of services to their clients, including checking and savings accounts, loans, foreign exchange transactions, and more. Deposit acceptance and credit creation are the two primary sources of income for commercial banks.
Generally, commercial banks are broken into three categories: business banks, commercial banks, and corporate banks. Normally, business banks cater to small and medium-sized businesses, commercial banks typically focus on the middle market, and corporate banks cater to large businesses, financial institutions, and governments. However, in practice, the term "commercial bank" can refer more generally to all three types of these banks that specialize in lending to businesses.
To learn more about commercial banks, we recommend our guide: Intro To Commercial Banking.
Retail banks are more straightforward for most people to understand because they have likely been using retail banking services for their entire adult lives.
Retail banks specialize in providing banking services to individuals similar to how commercial banks focus on providing them to businesses and organizations. Retail banks provide checking and savings accounts, personal credit cards, mortgages, and personal loans to these individuals.
There are many ways that banks and financial institutions can be structured. Here, we’ll cover some of the most common ways.
Universal banks are banks that typically offer any banking product or service that could be offered to any potential client (from consumers to institutional investors). These full-service banks offer retail banking, commercial banking, and investment banking products and services.
Examples of universal banks include HSBC and Citi Group.
Large banks are similar to universal banks but normally don’t offer investment banking services. They offer retail banking and commercial banking services.
Examples of large banks are Bank of America and Wells Fargo.
Investment banks can be organized like large banks or universal banks, but not necessarily either. We covered investment banks above, but for clarity, we want to further explain that investment banks typically focus on underwriting and M&A advisory services, but can be structured and organized in different ways. They tend to be internationally focused and based out of major financial centers like London or New York.
Examples of investment banks are Goldman Sachs and Barclays.
Community Banks tend to focus on individual consumers (retail banking) and on small business banking. These banks tend to be regionally focused. There are over 18,000 community banks in the United States.
Digital Banks have a similar focus to retail banks but focus online only as opposed to structuring and organizing their business with physically located branches. Digital banks focus on retail banking almost exclusively but may offer business checking and savings accounts as well.