The primary function of commercial banking is the transfer of funds from those parts of the economy with cash surplus to those parts with cash needs. Acting as the intermediary between these parties, banks expect to make a profit. The business of commercial banking, however, has become extremely intricate, due to the inherent complexity of collection and disbursement of money, the enormity of today's world economy, and the social, governmental, and legal restrictions imposed on the industry.
In addition to being complex, commercial banking has become an industry of continual change brought about by external and internal pressures. The external pressures are the result of changes in the legal, legislative, and regulatory environments surrounding the financial services industry in general and commercial banking in particular. The entrance of many large, non-bank entities, such as securities investment firms, into what was once regarded as the domain of commercial banking, with such quasi-demand-deposit services as cash management accounts, has put new pressures on banks. However, commercial banks have been constrained in their response to this encroachment by laws that limit their activity. For instance, the Glass-Steagall Act forbids commercial banks from undertaking securities activities, except for the buying or selling of securities on instruction for customer accounts. The Bank Holding Company Act of 1956, as amended in 1970, also prohibits banks from engaging in activities "not closely related to banking." Commercial banks have responded to these legal restrictions by trying to expand and improve the types of services they may legally provide. Banks are also emphasizing strategic planning, so they will be ready to act offensively in the face of further regulatory changes, rather than having to react defensively.
The commercial banking industry has also been changing rapidly in response to internal financial pressures. Recent periods of high inflation, both domestic and foreign, have made it necessary for banks to consider the increased time value of money. Fast and reliable transfer of funds has become critical. These and other factors have led commercial banking into the high technology areas of communications, computers, and information services.
In light of the increased competition commercial banks face, future emphasis will probably be placed on managerial aggressiveness and innovation. Continued change in the regulatory environment will create new job opportunities, as will the increased utilization of sophisticated new banking technologies. The old view of bankers as staid traditionalists averse to change or innovation is an anachronism in today's banking industry. Therefore, today's banks are seeking people with a wide range of skills.
Commercial Banking Industry Composition
At the end of 1983 there were nearly fifteen thousand commercial banks in the United States. Within this group, there is tremendous variation in size and composition. Approximately 75 percent of them have less than $25 million in deposits; less than 2 percent have deposits of more than $500 million. Banks of the latter size control vast resources of capital, and it is estimated that the top eighty commercial banks hold more than 40 percent of all bank deposits in the United States. The largest commercial bank, for example, had deposits of more than $100 billion in 1983.
Banks not only vary in size; they also differ in structure, using either unit or branch banking. In unit banking, a single office provides all banking services. In branch banking, a lead office controls corporate policy and regulations, while branch offices serve the banking needs of customers on a local basis. Banks involved in retail consumer banking are more likely to engage in branch banking. Branch banking, although limited in some states, has been growing in recent years and will continue to do so as laws and regulations prohibiting interstate banking are eased or repealed.
The activities of most regional banks would be limited by their relatively small size if they had to rely on their own resources alone. Therefore a system of "correspondent banking" has developed. In this system, large banks, called money center banks, offer services to the smaller regional banks in return for the smaller bank leaving funds at the money center bank (called compensatory balances) and various fees. Money center banks also participate in loans arranged by regional banks when the regional bank is too small to carry the entire sum alone. In this way regional and local banks across the nation are connected with large money center banks. Many of the largest commercial banks have correspondent banking relationships with regional banks.
Classical Banking Activities
Historically, an important source of money for commercial banks to lend has been savings. Though savings continues to be an important source of funds, banks have had to rely more heavily on other sources for money in recent years, such as purchasing money from other corporations and the federal government. Loans are the main money-producing activity of banking and take many forms, including small consumer loans, home mortgages, corporate loans, real estate loans, institutional loans, and government loans.
Most commercial banks divide their activity into retail consumer banking and wholesale banking. This division recognizes the inherent difference in types of loans made: A car loan or home mortgage is treated differently from a multimillion-dollar loan to a large corporation or to a government. Because of the sophistication of the modern financial industry, however, retail consumer banking is involved in much more than savings and small loan administration, and wholesale banking is involved in more than the securing and administration of large loans.
Retail Consumer Banking
Retail consumer banking concentrates on serving the various banking needs of the individual, family, or small business, providing such services as consumer or small-business loans, home mortgages, savings accounts, demand accounts, credit cards, traveler's checks, and financial management advice. This part of commercial banking is changing rapidly in response to further developments in electronic, automated, and home banking, as well as changes in the regulatory environment surrounding branch and interstate banking.
You will find employment opportunities in retail consumer banking to be diverse. Important positions in branch consumer banking include consumer loan officer, mortgage officer, community small-business loan officer, and branch manager. Opportunities in indirect consumer financial services exist in both branch and home offices; many involve working with traveler's checks, bank credit cards, and other fee-based services.
Branch Consumer Banking
Consumer Loan Officer: The consumer loan officer administrates small loans taken out by consumers to pay for a car, home improvements, recreational equipment, and so forth. The work is generally straightforward, since eligibility requirements and interest rates are set by bank corporate policy.
Mortgage Officer: This position, like that of the consumer loan officer, is not complicated, and usually involves the administration of mortgage loans for family homes. Eligibility standards and interest rates in this field are also set by central policy.
Community Small-Business Loan Officer: In this position, you would be involved in activities similar to those of corporate lending officers in the wholesale banking division, but on a smaller scale. You would deal with community businesses with modest capital needs. For instance, a local firm might need financing to cover the costs of a seasonal inventory, or a farmer might need financing to cover the cost of seed. Typically, community small-business loans require more detailed credit analyses than consumer loans. The loan officer generally works closely with the branch manager in deciding whether or not a loan will be made.
Branch Manager: The branch manager is involved in three main areas of activity: branch-home office relations, branch management, and community relations.
A branch bank office is, in essence, a retail outlet of the main bank. As a branch manager, you would report to the home office on the status, position, and profitability of your branch. You would be responsible for seeing that central bank policy is implemented and followed. Within the branch, you would be responsible for management of all systems and personnel. This can involve-among other activities- hiring and firing, supervising installation of new administrative and technical systems, periodically checking to make sure checking and savings accounts adhere to bank policy, and determining work assignments. You would also work closely with loan officers in reviewing business loans to ensure that quality loans are being made.
As branch manager, you would be the representative of the bank in the community, and therefore have the responsibility of maintaining good community relations. You would have to foster and maintain relationships with individuals and businesses, and be responsive to the needs of the community. Participation in community affairs is commonly done to promote the bank's good-neighbor image.
Managers of small branches usually have had three or more years of bank experience. From this position one can advance to management of a larger branch and eventually into the home office as manager of a number of branches or a region.
