Banks are among the most important financial institutions. The way in which a bank is organized and operates is determined by its objectives. The first and most important function of a central bank is to accept responsibility for advising the government on the making of the country’s financial policy, and then to see that it is carried out. The aim of commercial banks is to earn profit.
A commercial bank, which provides the same range of services year after year, is less likely to be successful. Successfully competing in the constantly changing global business environment requires market-driven strategies that are responsive to customers’ needs and wants. Executives who do not recognize the changes occurring in the vast array of markets for products and services will not be able to cope with the unprecedented competitive pressure in the market place. To improve competitive advantages they are drastically altering their business and marketing strategies, which may include downsizing, repositioning, market segmentation, market niching, altering the business portfolio, pricing, promotion and strategic alliances between companies. With the global increase in the number of competitors banks face in their major markets, more and more banking firms have become market-driven and more alert to the changing service demands of their customers and also to the challenges posed by the bank and nonbank competitors. This trend forced bank managers to become more concerned with service marketing activities and with profitability and growth.
Banks are usually organized to follow their functions and supply the services demanded by them as efficiently as possible. Moreover, because larger banks generally play a wider range of roles and offer more services, a bank’s size is also a significant factor in determining how banks are organized. This can be seen most directly by looking at the typical organization chart for large versus small banks.
This bank, typical of hundreds of banks serving small and medium-size communities, is heavily committed to attracting small consumer-oriented deposits and making consumer installment small business loans. A bank like this is often called a retail bank opposed to a wholesale institution that concentrates mainly upon serving commercial customers and making large corporate loans.
The large banks possess some potential advantages over small and medium-size banks. Because the largest institutions serve many different markets with many different services, they are better diversified both geographically and by product line, to withstand the risks of a fluctuating economy. They also possess the important advantage of being able to raise financial capital at relatively low cost and the professional expertise to focus that new capital on the most promising loans and business acquisitions.
Where law and regulations permit, the bank may form a branch banking organization. The full range of banking services is offered from several locations, including head office and one or more branch offices.
The existence of so many small banks and so many different kinds of banking organizations has created the need for strong interbank relations. Banks set up formal and informal relationships with each other through an extensive system of correspondent banking. The rapid geographic expansion and consolidation of banking units have reached well beyond boundaries of a single nation. The major banks establish extensive international operations not only by extending their branch network abroad but by establishing correspondent relations with foreign banks too.