CAT / FIA FFM Syllabus C. Managing Cash Balances - Relationships between financial institutions - Notes ^{5 / 13}

Primary (retail) banks are banks that operate the payments mechanism and are usually called commercial banks or clearing banks.

Secondary banks deal mostly with wholesale business in the secondary money markets not in the high street.

The statement of financial position of a bank consists of its liabilities (mostly deposits of one sort or another) and its assets (mostly loans to customers of one sort or another).

Banks must make sure that their assets are sufficiently liquid to meet their depositors' needs, but not so liquid that their profits suffer. Banks make a profit by lending at a higher rate of interest than the rate they pay for deposits.

The central bank (the Bank of England in the UK) has various roles and is particularly important for the government's monetary policy.

Retail banking

is the banking activity of the traditional 'high street' bank, dealing with relatively small deposits and small loans to customers.
 
Retail services are also now conducted over the telephone or the Internet by many banks.

Retail banks:

• Provide a payments mechanism

• Provide a place where people store wealth

• Lend money on overdraft or by loan

• Offer a variety of services

Wholesale banking

involves small numbers of customers with larger deposits or requiring larger loans.

Because large sums are involved, customers expect the banks to trim their profit margins and offer a cheaper, more competitive service (eg by offering higher rates of interest to depositors or charging lower rates to borrowers).

All businesses have bank accounts.

Banks, like other businesses, are profit-making organisations. 

A bank's policy towards its customers depends on:

• Its need to satisfy its own shareholders

• Government monetary policy (the level of interest rates and so on)

• Its own creditworthiness (e.g. how cheaply it can borrow money)

• The general economic context