Modern banking systems are of two main types. In one system, there is a small number of banks, each with a very large number of branch offices; in the other system, there is a very large number of independent banks. The banking systems of Britain and Canada are of the first type, with only a few banks accounting for the overwhelming bulk of the business. In the United States, There are approximately 15,000 independent banks, some, such as the Bank of America, with hundreds of branches,others with but a single office. Branch banking in the United States is governed by state law. Interstate branching is not allowed, and in some states only “unit banks” with a single office are permitted.
The Canadian banking system consists of eleven chartered banks, which are privately owned, profit-seeking institutions. The five largest together hold 90 percent of total bank assets, and each has more than 900 branches. All of the banks have certain common attributes: They hold deposits for their customers; they permit certain deposits to be transferred by cheque from an individual account to other accounts held in any bank branch in the country; they make loans to households and firms; and they invest in government securities.
Chartered banks are by no means the only financial institutions in the country. Many other institutions, such as trust companies, mortgage loan companies, and credit unions accept savings deposits and grant loans for specific purposes. Finance companies make loans to households for practically any purpose – sometimes at very high effective interest rates. The post office and the telegraph system will transfer money, and issuers of credit cards will extend credit with which a wide range of purchases can be made on a buy-now, pay-later basis.
What distinguishes banks from these and other members of the financial system, each one of which does some of the things that banks do? The chartered banks are unique in one basic way. They accept demand deposits upon which cheques may be drawn and they are able to transfer funds from one person’s deposit to another’s when ordered to do so by a customer’s cheque. Other financial institution offer chequable savings accounts, but they do not have facilities to transfer funds to accounts in other institutions and must use the banking system to clear cheques. In any event, only a small fraction of the dollar volume of cheques issued is accounted for by cheques drawn on nonbank institutions.
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