Commercial banking in the UK is conducted on the basis of an interlocking ‘branch’ network system that caters for local and regional needs as well as allowing the major banks, such as Barclays and NatWest, to cover the national market. Increasingly, the leading banks have globalized their operations to provide traditional banking services to international companies as well as diversifying into a range of related financial services such as the provision of MORTGAGES, INSURANCE and UNIT TRUST investment and SHARE PURCHASE/SALE.
Bank deposits are of two types:
(a) sight deposits, or current account deposits, which are withdrawable on demand and which are used by depositors to finance day-to-day personal and business transactions as well as to pay regular commitments such as instalment credit repayments. Most banks now pay interest on outstanding current account balances;
(b) time deposits, or deposit accounts, which are usually withdrawable subject to some notice being given to the bank and which are held as a form of personal and corporate saving and to finance irregular, ‘one-off’ payments. Interest is payable on deposit accounts, normally at rates above those paid on current accounts, in order to encourage clients to deposit money for longer periods of time, thereby providing the bank with a more stable financial base.
Customers requiring to draw on their bank deposits may do so in a number of ways: direct cash withdrawals are still popular and have been augmented by the use of cheque/cash cards for greater convenience (i.e. cheque/cash cards can be used to draw cash from a dispensing machine outside normal business hours). However, the greater proportion of banking transactions is undertaken by cheque and CREDIT CARD payments and by such facilities as standing orders and direct debits. Payment by cheque is the commonest form of non-cash payment involving the drawer detailing the person or business to receive payment and authorizing his bank to make payment by signing the cheque, with the recipient then depositing the cheque with his own bank. Cheques are ‘cleared’ through an inter-bank CLEARING HOUSE SYSTEM, with customers’ accounts being debited and credited as appropriate (see also BACS). Credit cards enable a client of the bank to make a number of individual purchases of goods and services on CREDIT over a particular period of time, which are then settled by a single debit to the person’s current account or, alternatively, paid off on a loan basis (see below).
Under a standing order arrangement, a depositor instructs his bank to pay from his account a regular fixed sum of money into the account of a person or firm he is indebted to, again involving the respective debiting and crediting of the two accounts concerned. In the case of a direct debit, the customer authorizes the person or firm to whom he is indebted to arrange with his bank for the required regular payment to be transferred from his account.
Commercial banks make loans to personal borrowers to finance the purchase of a variety of products, while they are a major source of WORKING CAPITAL finance for businesses covering the purchase of short-term assets such as materials and components and the financing of work-in-progress and the stockholding of final products. Loans may be for a specified amount and may be made available for fixed periods of time at agreed rates of interest, or may take the form of an overdraft facility, where the person or firm can borrow as much as is required up to a pre-arranged total amount and is charged interest on outstanding balances.
A commercial bank has the dual objective of being able to meet currency withdrawals on demand and of putting its funds to profitable use. This influences the pattern of its asset holdings; a proportion of its funds are held in a highly liquid form (the RESERVE ASSET RATIO), including TILL MONEY, BALANCES WITH THE BANK OF ENGLAND, CALL MONEY with the DISCOUNT MARKET, BILLS OF EXCHANGE and TREASURY BILLS. These liquid assets enable the bank to meet any immediate cash requirements that its customers might make, thereby preserving public confidence in the bank as a safe repository for deposits. The remainder of the bank’s funds are used to earn profits from portfolio investments in public sector securities and fixed-interest corporate securities, together with loans and overdrafts.
In recent times, the commercial banks have been markedly affected by changes introduced by the FINANCIAL SERVICES ACT 1986, which has allowed other financial institutions to set themselves up as ‘financial supermarkets’, offering customers a banking service and a wide range of personal financial products, including insurance, mortgages, personal pensions, unit trusts and individual savings accounts (ISAs), etc. This development has introduced a powerful new competitive impetus into the financial services industry, breaking down traditional ‘demarcation’ boundaries in respect of ‘who does what’, allowing banks to ‘cross-sell’ these services and products in competition with traditional providers such as the BUILDING SOCIETIES, INSURANCE COMPANIES, UNIT TRUSTS, etc.
This and other developments (in particular, the globalization of investment banking) have in turn caused a number of structural changes. Intra- and inter-takeovers-mergers have occurred (e.g. the Lloyds-TSB Banks’ tie-up and their takeover of the Cheltenham and Gloucester building society); foreign banks have increasingly moved into the UK through either takeover (e.g. Hong Kong and Shanghai Banking Corp’s takeover of the Midland Bank and Deutsche Bank’s acquisition of the Morgan Grenfell investment house) or by setting up local offices; building societies such as the Abbey National, Woolwich and Halifax have converted themselves into banks. Direct banking services (via the telephone and the internet) have increasingly taken market share away from traditional branch networks. This has led to pressure on banks to cut costs by reducing the number of their branches. Another notable development has been the rapid rise in ATMs (AUTOMATIC TELLER MACHINES, referred to popularly as ‘hole in the wall’ machines).
The commercial banks play a unique role in a country’s monetary system through their capacity to engage in multiple BANK DEPOSIT CREATION by providing credit through loans and overdrafts. Bank deposits constitute by far the largest single component of the broad MONEY SUPPLY (especially M4) and as such are a crucial target for the application of MONETARY POLICY in controlling the economy. See MONEY SUPPLY DEFINITIONS, BANK OF ENGLAND. See also EFTPOS.
commission 1 payments to AGENTS for performing services on behalf of a seller or buyer. Commissions are usually based on the value of the product being sold or bought. Examples of commissions include salespersons’ commissions, estate agents’ fees and insurance brokers’ commissions. 2 a body that acts as an ‘official’ regulatory or administrative authority with respect to a specified activity. For example, the COMPETITION COMMISSION hears cases of monopolies, mergers and anti-competitive practices referred to it by the Office of Fair Trading under UK competition policy. The European Commission is the main body responsible for the day-to-day administration of the affairs of the EUROPEAN UNION.
commodity 1 see GOODS. 2 raw materials rather than goods in general: for example, tea, coffee, iron ore, aluminium, etc.
commodity broker a dealer in raw materials. See COMMODITY MARKET.
commodity market a market for the buying and selling of agricultural produce and minerals such as coffee and tin. Commodity business is conducted through various international commodity exchanges, some of the more prominent ones being based in London, for example the London Metal Exchange and the London International Financial Futures Exchange.
Commodity markets provide an organizational framework for the establishment of market prices and ‘clearing’ deals between buyers and sellers (see CLEARING HOUSE SYSTEM). Commodity dealers and brokers act as intermediaries between buyers and sellers wishing to conclude immediate spot transactions (see SPOT MARKET) or to buy or sell forward (see FUTURES MARKET).
commodity money products that can be used as a means of payment (see MONEY) but which are valuable in their own right, for example, cigarettes or alcoholic drinks. Commodity money is generally only used as a means of payment if confidence in money falls as a result of, say, rapid INFLATION.
Common Agricultural Policy (CAP) the policy of the EUROPEAN UNION (EU) for assisting the farm sector. The main aims of the CAP are fair living standards for farmers and an