Banking and Insurance
SIC 6000, 6100, 6300, 6400
NAICS 5221, 5222, 524
Banks and insurance companies constitute a major component of the broader global financial industry. The banking segment comprises commercial banks, savings banks, international banks, credit unions, mortgage bankers, loan brokers, and trust companies. Insurance encompasses life, casualty, property, surety, pension funds, and health policy brokerages and agents. Certain banks derive all or a significant share of their revenues from credit card accounts. For more details specific to this business, see also Credit and Debit Card Issuers.
The finance and insurance industries experienced growing deregulation, globalization, and consolidation into the mid 2000s. As countries throughout the world—including industrial leaders such as Japan, the United States, Germany, and France—liberalized their finance systems, banks and insurance brokers pursued foreign markets and began to integrate their services. In addition, banks and insurers continued consolidating in order to achieve cost-effective economies of scale and scope, as well as to increase their product offerings to customers. Rankings of the world's largest financial service firms were repeatedly reshuffled as mergers created new industry giants; there were many companies that ended 2004 with total assets valued over US$1 trillion. In total, the banking industry's top 1000 banks had total assets of US$52.39 trillion in 2004.
Commercial banks are usually classified in three categories: unit, branch, and group. Some nations are characterized by only one type, but most nations have all three. Unit banking exists when a single-office institution provides banking services. Historically, this was the most common form of banking in the United States. The presence of unit banking is often a result of tradition, law, vested interests, and the ability of this type of organization to meet the demands of local banking customers. When communities are homogeneous and small businesses and farming are dominant, unit banking works well. Unit banking becomes less practical as a nation becomes increasingly industrialized, culturally diverse, and geographically enlarged. This is especially evident as large geographical areas become economically interdependent. In industrial societies, populations are highly mobile and place increasing importance on the convenience that multiple bank locations provide. The need for larger institutions is even stronger among businesses, which engage in transactions on a national or even international scale and thus require complex services to support such activities as issuing stock, acquiring other businesses, or financing a new business venture. As a result, branch banking has become the norm in the world's major economies.
Branch banking exists when a single banking firm conducts operations at multiple sites. Branches are wholly owned and usually controlled by one headquarters. The level of service may vary between branches of the same bank, as some small satellite offices may not offer the full line of services available at major branches or headquarters.
One of banking's essential functions is facilitating the transfer of funds. As the use of checks, credit cards, debit cards, electronic transfers, and other non-currency payment media accelerates among the world's populations, this function is increasingly important.
Banks' second major function is to serve as a financial depository for customers' liquid assets. This service provides an efficient and highly secure means of storing wealth for accumulation or future use. Banks generally hold a fixed proportion of their customers' aggregate deposits in reserve in order to have funds available on demand. The remainder of deposited funds are channeled into various operations of the bank, notably as credit to other customers.
Extending to customers different types of credit, including diverse loans and credit accounts,;is what traditionally makes banking lucrative. By charging the borrower interest fees in excess of what they pay back to the depositor, banks earn revenue by serving as the intermediary. Bank lending is very important to all nations' economies because it enables communities to finance agricultural, commercial, and industrial activities. This type of credit-infused growth is called indirect or "roundabout" production. Direct production refers to consumer goods secured by the direct application of labor to land or natural wealth. Most countries regulate their banking systemsexclusively on the national level. The United States, however, regulates its banking system on both the national and regional levels.
Commercial banks also serve a variety of functions specific to business transactions. They can issue commercial letters of credit, sometimes called lines of credit, which are written statements guaranteeing that a bank will loan a customer a specified range of money. Banks issue letters of credit when a seller is unwilling to release his or her products and wait for payment to arrive in the mail. A letter of credit makes a loose financial arrangement more binding and businesslike. When a bank issues a letter of credit, both the buyer and seller are protected. The credit of the bank is substituted for the credit of the buyer, an arrangement designed to reassure the seller. A great deal of international trade is financed in this manner. Such financing of foreign trade and travel by commercial banks contributes to a freer flow of commerce among nations. As foreign trade and travel increase throughout the world, so too do the services of international commercial banks.
Commercial banks also provide trust services to customers worldwide. Individuals who have accumulated estates, even of moderate size, provide for the distribution of assets prior to death by writing wills and securing bank trust departments to act as executors. In many cases, bank trust departments are responsible for investing and caring for the funds within an estate. They also distribute the proceeds as established by trust agreements.
The oldest service provided by commercial banks is the safekeeping of valuables. Banks have vaults that are nearly impossible for non-authorized people to enter and that have established records of safety. In most cases, the protection of valuables falls into two areas or departments within a bank: safe deposit boxes and safekeeping. Customers can rent safe deposit boxes from banks. Under such an arrangement, customers have control of their own valuables at all times. The bank simply provides the vault, the box, and the other facilities necessary for a proper safe deposit box. Most important, however, the bank controls access to the vault and guarantees that the customer who rented the box is the only one permitted access. Customers use their safe deposit boxes for securities, deeds, insurance policies, and other items of value.
Safekeeping differs from safe deposit box services because the bank assumes custody of the valuables and acts as an agent for the customer, often a corporation. Items accepted for safekeeping differ considerably, but the service usually cares for securities such as stocks and bonds. In most commercial banking situations, the department is concerned with holding securities that a customer has pledged as collateral for a loan or turned over to a trust department as part of an estate.
Commercial bank trust departments provide many additional services to corporations. In some cases they administer pension and profit-sharing plans for companies. They also serve as trustees in connection with bond uses and as transfer agents and registrars for corporations. In some cases, commercial bank trust departments administer sinking funds and perform other duties associated with the issuance and redemption of stocks and bonds.
Throughout the late twentieth and early twenty-first centuries, commercial banks have engaged in brokerage services, buying and selling securities for customers. This diversification has encouraged banks to form joint ventures with full-service brokerages to provide complete advisement and investment services. In many countries, the authority of commercial banks to provide brokerage services is prohibited. Governments justify this prohibition on the belief that excessive bank credit based on speculation can lead to bank failures and economic disarray. Although international banking authorities are less successful in controlling banking stability because of the lack of well-defined jurisdictions from one nation to another, national authorities within many large industrial countries have introduced elaborate controls on banking practices. These controls are designed to prevent banks from failing and to safeguard the country's financial system if they do.
In the United States, the Glass-Steagall Act of 1933 formally separated banking from securities and prevented banks from establishing securities affiliates. However, by the late 1990s this separation was eroding quickly. The Gramm-Leach-Bliley Act of 1999 officially repealed Glass-Steagall, leaving U.S. banks free to...
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