WHAT IS CONVENTIONAL BANKING
Conventional banking refers to the
traditional banking system in which a bank takes deposits from savers and uses
those funds to make loans to borrowers. Conventional banks may offer a wide
range of financial products and services, including savings and checking
accounts, loans, credit cards, and investment products. They are regulated by
government agencies and are typically insured by the Federal Deposit Insurance
Corporation (FDIC) in the United States.
Conventional banking is the traditional
banking system that has been in place for many years. It is the system in which
banks take deposits from savers and use those funds to make loans to borrowers.
Conventional banks may offer a wide range of financial products and services,
including savings and checking accounts, loans, credit cards, and investment
products. They are regulated by government agencies and are typically insured
by the Federal Deposit Insurance Corporation (FDIC) in the United States.
One of the main functions of conventional
banks is to accept deposits from customers. This can include savings accounts,
checking accounts, and certificates of deposit (CDs). Savings accounts
typically pay interest on the deposited funds, while checking accounts allow
customers to write checks or use debit cards to access their funds. CDs are
time deposits that pay a higher rate of interest than savings accounts, but the
funds cannot be withdrawn before the end of the term.
Another important function of conventional
banks is to make loans to customers. This can include personal loans,
mortgages, and business loans. Banks use the funds deposited by savers to make
these loans, and they charge interest on the loans to earn a profit. Banks also
earn income from fees for services such as account maintenance, ATM usage, and
wire transfers.
Conventional banks also offer a variety of
investment products to customers. These can include stocks, bonds, mutual
funds, and annuities. Banks may also offer retirement accounts such as
Individual Retirement Accounts (IRAs) and 401(k) plans. Investment products
allow customers to grow their money over time and to diversify their
portfolios, which helps to reduce risk.
Conventional banks are heavily regulated by
government agencies to ensure the safety and soundness of the financial system.
In the United States, the main regulatory agencies are the Federal Reserve, the
Office of the Comptroller of the Currency (OCC), and the Consumer Financial
Protection Bureau (CFPB). These agencies set rules and guidelines for banks to
follow, and they also supervise and examine banks to ensure compliance.
Another important aspect of conventional
banking is deposit insurance. The Federal Deposit Insurance Corporation (FDIC)
insures deposits at FDIC-insured banks and credit unions up to $250,000 per
depositor. This means that even if a bank fails, depositors will still be able
to get their money back up to the insured amount. This helps to ensure that
people can have confidence in the banking system and feel comfortable
depositing their money in banks.
In summary, conventional banking refers to
the traditional banking system in which banks take deposits from savers and use
those funds to make loans to borrowers. Conventional banks offer a wide range
of financial products and services, including savings and checking accounts,
loans, credit cards, and investment products. They are regulated by government
agencies and are typically insured by the Federal Deposit Insurance Corporation
(FDIC) in the United States. These features help to ensure the safety and
soundness of the banking system and give customers a wide range of options to
manage their money.
HISTORY
OF CONVENTIONAL BANKING
The history of conventional banking can be
traced back to ancient civilizations, where moneylenders would provide loans to
individuals and merchants. However, the modern system of conventional banking
as we know it today began to take shape during the Renaissance period in Italy
in the 14th and 15th centuries.
During this time, merchants and traders
needed a way to exchange money and conduct financial transactions, so they
began to deposit their money with moneychangers and goldsmiths. These early
bankers would then issue receipts for the deposited money, which could be used
to make payments and withdraw funds. This system of issuing receipts was the
precursor to the modern concept of bank deposits and the use of checks.
During the 17th and 18th centuries, banks
began to emerge as a distinct type of financial institution. The Bank of
Sweden, which was established in 1668, is considered to be the first central
bank in the world. Banks during this time primarily focused on providing loans
to governments, merchants, and wealthy individuals.
In the 19th century, the banking system in
the United States began to take shape with the establishment of the Second Bank
of the United States in 1816, which was modeled after the Bank of England.
However, the Second Bank was controversial and its charter was not renewed in
1836, leading to a period of bank failures and financial instability. In
response, the National Banking Act of 1863 was passed, which established a
national banking system and created the Office of the Comptroller of the
Currency (OCC) to oversee it.
During the 20th century, the banking system
continued to evolve. The Federal Reserve System was established in 1913 to
serve as the central bank of the United States and to help stabilize the
financial system. The Federal Deposit Insurance Corporation (FDIC) was
established in 1933 to insure deposits at FDIC-insured banks and credit unions.
And in the 1970s, banks began to offer new financial products and services such
as credit cards and ATMs.
In recent years, the banking industry has
undergone significant changes. The rise of technology and the internet has led
to the emergence of online banking and mobile banking. There has also been a
shift towards more diversified financial institutions, with banks offering a
wide range of products and services beyond traditional banking. Additionally,
the financial crisis of 2008 led to increased regulatory oversight of the
banking industry.
In summary, the history of conventional
banking can be traced back to ancient civilizations, but the modern system as
we know it today began to take shape during the Renaissance period in Italy.
Over the centuries, banks have evolved to meet the changing needs of society,
and today they offer a wide range of products and services beyond traditional
banking. The banking system is heavily regulated to ensure the safety and
soundness of the financial system and to protect the interests of customers.
In addition to the historical events I
mentioned earlier, there are a few other key moments in the history of conventional
banking that are worth noting:
The Glass-Steagall Act of 1933: This law was
passed in response to the stock market crash of 1929 and the subsequent Great
Depression. It separated commercial banking (which deals with everyday banking
services such as deposits and loans) from investment banking (which deals with
issuing and underwriting securities). The law was repealed in 1999, but some of
its provisions were later reinstated in the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 in response to the 2008 financial crisis.
The Monetary Control Act of 1980: This law
gave the Federal Reserve the authority to set reserve requirements for all
depository institutions, not just member banks. This helped to level the
playing field between banks and other types of financial institutions, and it
also helped to increase the Federal Reserve's control over the money supply.
The Community Reinvestment Act of 1977: This
law was designed to encourage banks to make loans and provide other financial
services to low- and moderate-income communities. Banks are evaluated on their
compliance with this law and are graded on a scale from "Outstanding"
to "Needs to Improve."
The Credit CARD Act of 2009: This law was
passed in response to concerns about predatory lending practices and the high
fees associated with credit cards. It established new rules for disclosing
credit card terms, restricted certain types of fees, and required credit card
companies to give customers more time to pay their bills.
As you can see, the history of conventional
banking is closely tied to the broader economic and political climate of each
era, and also to the needs and expectations of society. The regulatory
environment has been shaped by different laws and policies to protect the
interests of depositors, borrowers, investors and consumers, and to ensure the
stability of the financial system. This is why we have regulations like the
Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the
Consumer Financial Protection Bureau (CFPB) today, to supervise and monitor the
activities of banks and other financial institutions.
CONVENTIONAL
BANKING RULRS AND REGULATIONS
Conventional banking refers to the
traditional banking system, where banks accept deposits from customers and use
those funds to make loans to other customers. Conventional banking is regulated
by government agencies, such as the Federal Reserve in the United States and
the Central Bank in other countries. Banks are subject to a variety of rules
and regulations, including capital requirements, liquidity requirements, and
regulations aimed at preventing money laundering and fraud. Banks are also
required to follow consumer protection laws, such as the Truth in Lending Act
and the Equal Credit Opportunity Act in the United States, which are designed
to ensure that consumers are treated fairly by financial institutions.
In addition to the regulations mentioned
above, conventional banks are also subject to a number of other rules and
regulations. For example:
Banks are required to maintain a certain
level of reserves, which are funds set aside to meet customer withdrawal
requests and other obligations. This helps to ensure that banks have the
necessary liquidity to meet the demands of their customers.
Banks are subject to regular examinations by
government regulators, such as the Federal Reserve or the Office of the
Comptroller of the Currency, to ensure that they are operating safely and
soundly.
Banks are required to disclose certain
information to customers, such as the interest rates and fees associated with
different types of accounts and loans.
Banks are subject to regulations aimed at
preventing money laundering and other financial crimes, such as the Bank
Secrecy Act and the USA PATRIOT Act in the United States.
Banks are subject to regulations aimed at
protecting consumer privacy, such as the Gramm-Leach-Bliley Act in the United
States, which requires banks to disclose their information-sharing practices to
customers and to take steps to protect customer information.
Banks are subject to regulations aimed at
ensuring that they are treating customers fairly, such as the Community
Reinvestment Act in the United States, which requires banks to meet the credit
needs of the communities in which they operate.
Overall, conventional banks are subject to a
wide range of rules and regulations, which are designed to ensure that they are
operating safely and soundly, and that customers are treated fairly.
ADVANTAGES OF CONVENTIONAL
BANKING
There
are several advantages to using conventional banking:
Convenience: Conventional banks offer a wide
range of services, such as checking and savings accounts, loans, credit cards,
and online banking, which make it easy for customers to manage their finances.
Safety: Conventional banks are heavily
regulated and are required to maintain strict security measures to protect
customer deposits and personal information. Deposits in FDIC insured banks are
insured up to $250,000 per depositor per insured bank.
Creditworthiness: Conventional banks offer a
variety of loan products to customers with different creditworthiness. These
loans can help customers finance large purchases, such as a home or car, or help
them consolidate debt.
Network of ATMs: Conventional banks have a
wide network of ATMs, which customers can use to withdraw cash, check account
balances, and deposit checks.
Professionalism: Conventional banks have
professional staffs who are trained to provide financial advice, and can help
customers with a variety of financial products and services.
Financial planning: Conventional banks offer
financial planning services, investment products and wealth management services
which help customers to plan and achieve their financial goals.
Convenient payment options: Conventional
banks offer a variety of ways to pay bills, including online bill pay,
automatic payments, and debit or credit card payments.
Government backing: Conventional banks are
regulated and backed by the government, which provides a level of security and
trust.
Overall, conventional banking offers a wide
range of services and products that can help customers manage their finances,
achieve their financial goals and have a peace of mind.
DISADVANTAGES OF CONVENTIONAL
BANKING
There
are also some disadvantages to using conventional banking:
Fees: Conventional banks often charge a
variety of fees for their services, such as account maintenance fees, ATM fees,
and penalty fees for late payments or overdrafts.
Limited hours: Conventional banks usually have
limited hours of operation and are closed on weekends, which can make it
difficult for customers to access their accounts or conduct transactions.
Limited accessibility: Conventional banks may
not be accessible to everyone, particularly those who live in rural or
underbanked areas.
Interest rates: Interest rates on savings
accounts and other deposit accounts are generally lower than other forms of
investment, which means that customers may not earn as much on their savings
over time.
Risk of loan default: Conventional banks make
loans to customers, but there is a risk that the customer will default on the
loan, which can result in financial loss for the bank.
Bureaucracy and paperwork: Conventional banks
often require customers to fill out a lot of paperwork and go through a long
process to open an account or apply for a loan, which can be time-consuming and
frustrating.
Limited investment options: Conventional
banks typically offer a limited range of investment options, which may not be
suitable for all customers.
Cybersecurity risk: With the increasing use
of digital banking services, conventional banks are also exposed to the risk of
cyber attacks and data breaches, which can put customers' personal and
financial information at risk.
Overall, while conventional banking offers
many advantages, it also has some disadvantages, such as fees, limited hours,
bureaucracy and paperwork, limited investment options and cybersecurity risk.
Customers should weigh these factors when deciding whether to use a
conventional bank.