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Banking System: Definition & Types

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  • 0:00 What Is a Banking System?
  • 0:36 Functions
  • 1:28 Types
  • 3:40 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
Banks are a huge part of our lives. In this lesson, we will explore the banking system. We will learn about different types of banks as well as how they each function.

What Is a Banking System?

When you sit back and think about it, banks are often a huge part of our lives. We deposit our paychecks, take out loans, and set up savings accounts, all at a bank. But what do banks do? What are the different types of banks? Let's start finding some answers to these questions by looking at the different types of banks that make up a banking system.

A banking system is a group or network of institutions that provide financial services for us. These institutions are responsible for operating a payment system, providing loans, taking deposits, and helping with investments.

Functions

Banking systems perform several different functions, depending on the network of institutions. For example, payment and loan functions at commercial banks allow us to deposit funds and use our checking accounts and debit cards to pay our bills or make purchases. They can also help us finance our cars and homes.

By comparison, central banks or systems distribute currency and establish money-related policies. Investment banks or systems conduct trades or deal with capital markets.

Many banks are profit-seeking entities with stockholders. They obtain profits by charging more interest for loans and paying less interest on deposits. For example, a bank may charge a 3.91% interest rate on a 30-year, fixed rate mortgage, but offer an interest rate of only 0.15% on a savings account of $100,000.

Types

So, now that we know what a banking system is and how it functions, let's look at four types of banking systems.

Commercial Banks

Commercial banks, such as community banks, accept deposits and offer business and consumer loans. At a commercial bank, you can open a checking or savings account, apply for a car or homeowner loan, transfer money, or pay your bills. Some commercial banks also offer insurance, investment, and retirement services. While community and commercial banks are usually chartered by the state in which they do business, some may be insured and overseen by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank.

Central and National Banks

The FDIC also insures national banks, which are investing members of the Federal Reserve System and are chartered by the United States of America. In contrast to a local commercial bank, they may have branches in major cities and the majority of states. National banks offer the same services found at a commercial bank, as well as global banking services. At a national bank, you could also open a money market account or trade bonds and stocks.

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