There are two main types of banks in any country. Investment bank and commercial banks.
Investment Banks.
Don’t link access to borrowers like the commercial banks do. This means, they don’t accept deposits and give loans.
They help savers locate the borrowers. Individuals and organizations or corporations who have large access sum of money and wants to invest in other companies or organizations seek assistance from investment banks. Investment banks can help a company buy another company.
Investment banks serve as marketing agents for financial securities. For example, if company A wants to start a mine in a country and wants to raise capital money, it can seek assistance from an investment bank to create shares and then sells them to potential customers who want to become the shareholders of company A.
An investment bank branch can branch out into commercial banking and insurance if the laws of a country allow it. Countries such as the US have laws that prevents investment banks from entering the commercial banking and insurance markets. Separation is necessary because investment banks have more financial resources which they can use to outplay other competitors in the commercial banking and insurance industries.
Commercial Banks
Links savers to the borrowers . Those who have access money can deposit as savings. Then those who need money will borrow from the bank. The bank then charges an interest to the borrower and then pays the saver an interest. The difference between interest charged to the borrow and interest paid to the saver. The interest charged to the borrower subtracted from the interest paid to the saver, the becomes the profit margin for the bank.
Gives a wide array of loans to borrowers. Example, house mortgage loan, personal loans, school fee loan etc.
Three (3) main benefits of depositing money in a commercial bank.
Bank has information about creditors
Commercial banks are licensed by each country’s national government through their respective Central Banks to accept deposits and give loans. As such, commercial banks have information about all types of borrowers. Both individual and institutional borrowers. They have information about customers who have low chance of default on their loans and those who have defaulted or likely to default.
They use various measures to measure the borrower’s financial health and build their credit profiles. Then they assess and award loans. This safeguards the saver’s money.
Reduce investment risk
Commercial banks lend to variety of borrowers and give many kinds of loans. Such as personal loans, home loans, school fee loans and etc. If one or several businesses or individuals default in repaying their loans, then the bank would still earn income from others which will be used to offset the bad loans. Although a saver have put their money in a single bank, their investment risk is spread out in the form of loans given to different types of borrowers.
The bank deposit has liquidity
If people or organizations want cash for operations or emergency, they can easily withdraw with very less transaction cost.
Economists use liquidity to define money. Liquidity is how easily people can convert an asset into cash.
Cash is more liquid. More liquid assets include cash and savings account. The least liquid assets include shares, cars, houses, machinery, land and etc. The least liquid requires more time and transaction cost to convert it into cash. For example, if someone wants to sell his or her house, then it takes time and effort to advertise the sale, pay for the real estate agents fees and etc. All these activities take time and expense.
These three (3) benefits makings depositing and saving with commercial banks more attractive than other forms investment such as shares, bonds and etc.
