The Organization & Structure of Banks & Their Industry

Mohammed Sohail Mustafa 1

Chapter: 03

The Organization & Structure of Banks & Their Industry


Organizational Forms of Banks

The arrangement of personnel & departments within a bank to produce & deliver its services. A bank with heavy involvement in consumer loans & deposits is called “Retail Bank”. The bank which concentrates mainly upon serving commercial customers & making large corporate loans is called “Wholesale Institution”.


Differences between Large & Small Banks Small Banks: The service operations of small banks are

usually monitored by a Cashier & Auditor working in the accounting division & by Vice-Presidents heading up the bank’s loan-fund raising, marketing & trust departments. These officers reports to the Senior Executives of the bank, consisting of the board Chairman; the President, who usually runs the bank from day to day; & Senior Vice Presidents, who are responsible for long-range planning & for assisting heads of the various departments in solving their most pressing problems. Senior management, in turn, reports periodically to the members of the Board of Directors that is selected by the Stockholders.


Differences between Large & Small Banks---Contd

Large Banks: This bank is owned & controlled by a holding company whose stockholders elect a Board of Directors to oversee the bank & nonbank firms allied with the same holding company. The largest institutions serve many different markets with many different services, they are better diversified – both geographically & product line – to withstand the risks of a fluctuating economy.


Unit Banking Organization The oldest kinds of banking, offer all of their services from

one office, though a small number of services [taking deposits, cashing checks ] may be offered from limited-service facilities such as:

• Drive-in windows.• Automated teller machine (ATM)• Retail store point-of-sale terminals.

Reasons for the growth of Unit banking system are:• Rapid formation of new banks.• On-line banking.• Megamergers.


Branch Banking It serves a rapidly growing region & finds itself

under pressure either to follow its business & household customers as they move into new areas or lose them to more conveniently located competitors.

Senior management of a branch banking organization is usually located at home office, though each full-service branch has its own management team with limited authority to make decisions on customer loan applications & other facets of daily operations.


Branch Banking----Contd

Branch Banking System

Full-ServiceBranchOffice

Home orHeadOffice

Full-ServiceBranchOffice

Drive-inWindow

ATM orPoint-of-saleTerminals in

Store

ElectronicCommunications

networks



Reasons for the growth of Branch Banking: Shifting of population from cities to suburban communities. Bank failures causes healthier banks to take over sick ones &

convert them into branch offices. Growth of business increases the credit needs of rapidly growing

corporations. Advantages of Branch Banking/Argument for Branch

Banking: Greater operating efficiency. Increases the availability & convenience of services to customers. Stimulate faster economic growth. Fewer bank failures because a branch bank is less dependent on

the volume of business from single industry or local market area.



Argument Against Branch Banking:– Drives out small competitors.– Leaving the customer with fewer sources of banking

services.– Leads to higher service fees.– Drains scarce capital away from local communities

toward the largest cities.– Slowing local economic development.– Loans & deposits interest rates increases through

mergers.


Bank Holding Company Organizations A bank holding company is simply a corporation chartered

for the purpose of holding the stock of at least one bank. Any company has control over a bank or over any company if—

(A)The company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company;

(B)The company controls in any manner the election of a majority of the directors or trustees of the bank or company; or

(C)The Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company.


Acquisition of bank shares or Assets It shall be unlawful, except with the prior approval of the Board, 1. For any action to be taken that causes any company to

become a bank holding company; 2. For any action to be taken that causes a bank to become a

subsidiary of a bank holding company; 3. For any bank holding company to acquire direct or indirect

ownership or control of any voting shares of any bank if, after such acquisition, such company will directly or indirectly own or control more than 5 per centum of the voting shares of such bank;

4. For any bank holding company or subsidiary thereof, other than a bank, to acquire all or substantially all of the assets of a bank; or

5. For any bank holding company to merge or consolidate with any other bank holding company.


Networking Banks communicating through electronic systems

to collect & move funds. The most familiar examples are networks of “Automated Teller Machine” (ATM), such as CIRRUS, PULSE, EXPRESS CASH, in which customers holding credit & debit cards issued by one bank in the network can carry out financial transactions through any ATM belonging to the same network, no matters which bank owns the particular machine being used.


A Typical Computer Network Involving POS Terminals & ATMs

POS TerminalsIn Stores

CPU(Account

Verification)

NetworkSwitching Units(sending transactionInformation to the

Correct banks)

Computer forBank A

Computer forBank B

Computer forBank C

ATM inStores


Advantages of Network-Centric Applications

Secure identification: Customers and vendors alike require some means of certifying the identities of parties in a proposed transaction. The technology of digital signatures, or secure identification certificates, has evolved to meet this need.

Document delivery :Exporters and importers are becoming less reliant on traditional banking services, but do need other services such as electronic documentation delivery. The Bolero study, organized by a consortium of international trading organizations, shippers and banks, found that the increased preference for shipping on open account -- a kind of barter system in which transactions are netted directly among the trading partners -- requires improved electronic documentation.


Advantages of Network-Centric Applications---Comtd

Payables Outsourcing: Expensive audit and control procedures are typically required only for large payments, which constitute only a small percentage of transaction volume. As a result, companies are willing to outsource their accounts payable function to companies such as Blizzard Processing.

Data Scrubbing: Corporate cash management customers will want to move forward with electronic bill presentment on outbound billing and electronic payment receipt on the inbound side.


Advantages of Network-Centric Applications---Comtd

E-registers and –Wallets: Organizations such as CyberCash currently give away electronic wallets, which function as record keepers and communicators for electronic payments. Going forward, CyberCash wants banks to brand electronic wallets with their own names and then distribute them to customers.

Search Services: Banks need transaction-capable Web sites that can facilitate core banking services. Then they need channel partners that can direct traffic their way. And finally, they need content that makes the Web experience worthwhile. One form of content is search and selection. Barclays Bank is demonstrating how this can work through its Barclays Square trading station.


Foreign Bank penetration of Domestic Market Representative Offices: Facilities operated in a

different region or nation from a bank’s home office that provide links back to the home office.

Agency Offices: Offices that provide limited services to customers in distant markets, such as credit & cash management services.

Full-Service Branches: Offices that provide the same full menu of services as a bank’s home office.

Shell Branches: Special offshore facilities set up to raise new funds & avoid some regulations.


Reasons for the Rapid Growth of Foreign Bank Activities

1. The financing of exports from the home country to host country.

2. Providing services to foreign nationals who have come to study or work.

3. Tapping the Money Market for liquid funds.4. Assisting with the flow of foreign capital into the most

promising local investments.5. Avoiding regulatory restrictions on banking in their

home countries by entering the more open local market.


Foreign Banks in Bangladesh

1. American Express Bank Ltd. 2. Citibank N.A 3. Commercial Bank of Ceylon Limited. 4. Habib Bank Ltd. 5. National Bank of Pakistan 6. Shamil Bank of Bahrain E.C. 7. Standard Chartered Bank Ltd. 8. State Bank of India 9. The Hong Kong and Shanghai Banking Cor. Ltd.

(HSBC) 10. Woori Bank

The Organization & Structure of Banks & Their Industry

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