Commercial Bank Management Research Paper Starter

Commercial Bank Management

(Research Starters)

Commercial banks have undergone great changes during the 20th and early 21st centuries, paralleling the ongoing evolution of the new ways in which business and commerce are conducted. This paper will provide an in-depth analysis of how such institutions are managed as well as the role commercial banks play in the 21st century economy. By understanding the many types of services such institutions offer, the reader will glean a better understanding of the vital contributions commercial banks provide for today's entrepreneurial environments.

Keywords: Commercial Banks; Federal Deposit Insurance Corporation (FDIC); Federal Reserve; Glass-Steagall Act; Great Depression; Intermediate-term Loan; Long-term Financing; Risk

Overview

Background

On April 18, 1906, the city of San Francisco experienced one of the most significant natural events in its storied history as a magnitude 7.8 earthquake violently razed much of the city. Amadeo Peter Giannini, who only two years earlier had founded the Bank of Italy in that city, immediately put on his clothes and rushed a horse-drawn produce cart to his bank. Picking through the rubble of his fledgling banking institution, he removed and secreted away about $2 million in gold, coins and securities. He brought the cart to the North Beach docks, where he set up two wooden barrels with a plank across them as a makeshift desk. Using the money from his leveled bank, he began to offer businesses credit based on informal agreements, helping to bring about the redevelopment of San Francisco.

Giannini's acts after the great earthquake were extraordinary measures taken during extraordinary times. However banks have long played a role, albeit somewhat understated during "normal" times, in the development and redevelopment of businesses and economies. Business is, after all, essential to the strength of an economic system — it provides jobs, produces goods and services, and generates tax revenues. For these reasons, banks — and in particular, commercial banks — have become the artery by which businesses receive their lifeblood at their earliest stages.

Commercial banks are also critical for the individual. Simple savings accounts, into which people have long deposited their personal funds, have expanded explosively into a tremendous range of options for individuals to see financial security and investment returns. Still, security is perhaps the most invaluable requirement in an individual's asset management endeavors, and the protections offered by commercial banks are not just anticipated but expected, as such institutions have long provided the most secure of financial management protocols.

Commercial banks have undergone great changes during the 20th and early 21st centuries, paralleling the ongoing evolution of the new ways in which business and commerce are conducted. This paper will provide an in-depth analysis of how such institutions are managed as well as the role commercial banks play in the 21st century economy. By understanding the many types of services such institutions offer, the reader will glean a better understanding of the vital contributions commercial banks provide for today's entrepreneurial environments.

A Brief History of Commercial Banks

In the earliest civilizations, those with wealth entrusted the storage of their gold and priceless items to an institution few dared to pillage, for it was one of the most fortified buildings in the city, was constantly crowded and was by reputation protected by the most powerful entities known: the gods. In fact, the first monetary depository was not a bank, government building or fortress, but a temple, a place whose sacredness was often enough of a deterrent for any would-be thief.

Of course, during these ancient times, temples did little with people's wealth except store it, where it would neither appreciate nor depreciate in value nor serve as the basis for any financial transaction. It was not until the 18th century BC, when the Code of Hammurabi was written, when priests in the temple also served as financial managers, administering loans and other financial arrangements with the people of the community.

Banks have evolved and diversified significantly since Hammurabi's era. People continued to put their pay and other personal financial wealth into savings banks, but others have used land banks to purchase their own real estate and investment banks to pursue growth via the markets. At the earliest stages of the formation of the United States, such diversity led a large percentage of the population to seek "one-stop" banking, creating a strong evolution of the commercial bank. Those seeking liquidity in their assets simply deposited their funds into a savings account, but a growing number of businesses and entrepreneurs sought loans and mortgages in order to strengthen their business position, yet they also sought liquidity. While they had the fortune of having access to a number of banking institutions, the majority of the early American banking customers used commercial banks, which were increasingly offering a wide range of services (Wright, 2001).

By definition, a commercial bank is an institution that provides banking services for businesses. Commercial banks provide savings and checking accounts for customers, but they also provide loans, lines of credit, foreign exchange and payment and transactions (Pritchard, 2009). While commercial banks' primary focus is on the business customer, a large percentage of the customers they attract are private individuals as well.

The growing use of commercial banks among business and individual customers alike has created issues for this form of banking. In the early 20th century, commercial banking had begun to expand into investing as well. Some leaders at the time of the Great Depression saw this trend as one of the contributions to the collapse of the stock market, as commercial banks were providing margin loans, underwriting stock purchases and even trading on stocks. When the market collapsed in 1929, commercial banks' attachment to the markets meant that the banks would suffer, exacerbating the situation. When President Franklin Roosevelt sought to reinvigorate the economy, he and his colleagues in Congress introduced the Glass-Steagall Act. Under this law, commercial banks and investment banks were given a definitive divorce, saying that the two should mesh no longer, in light of what Roosevelt saw as dangerous practices by a type of institution that should have been focused on financial security, not gains — a condition that is largely believed to have contributed to the epic collapse of Wall Street.

Glass-Steagall was functionally repealed in 1998 (the law's formal repeal occurred one year later), when investment giant Travelers (who owned Salomon Smith Barney) purchased commercial banking icon Citicorp. In fact, the failure of three of the five largest investment banks during the recession that began in 2007 has ignited interest in revisiting the pre-Glass-Steagall era (Gross, 2008), when commercial banks were heavily involved in investments.

Commercial banks, which were initially created for the purpose of business development and support, have become very diverse in terms of the services they provide. At the same time, they are increasingly seen as more trustworthy institutions for financial security than more limited-service banks or larger investment banks. It is important to understand how commercial banks manage this broad scope of services.

Applications

Loans

One of the most important services a commercial bank offers is the loan. Lending funds to any customer will indubitably help that party in pursuing an immediate and critical goal. Commercial banks have proven to be important resources for such pursuits.

Commercial lending may be seen in two general forms:

  • Intermediate-term Loans
  • Long-term Financing

Intermediate term loans are an arrangement that has a life of between one and three years. Consumers use such shorter-term loans in order to finance working capital needs, purchase equipment such as computers and small machinery, using the hardware that is purchased as the basis for the repayment of the loan. In long-term financing, monies are issued primarily for larger companies (rather than small businesses), who use the loan to purchase real estate or a facility. In the case of long-term loans, up to 80 percent of the target asset's value is typically paid, with the remainder of that property's value serving as the collateral (Peavler, 2009).

Loans are one of the most important services a bank may offer its customers, particularly when they seek funds to support their pursuits of vital assets, such as new home, office space, or...

(The entire section is 3891 words.)