A bank is an incorporated institution, the business of which is to receive money on deposit, cash, drafts and checks, make loans, discount commercial paper, make loans, as well as issue banknotes. Banks are monetary organizations that serve the interests of their depositors by ensuring the security of the deposited funds on the one hand (Baker McKenzie 2016). On the other hand, such institutions make a profit by investing the deposits made by their customers in the protective measures by extending loans. Commercial banks are the most widespread and essential types of banking institutions (Pritchard 2020). It is important to understand the functions of modern commercial banks because they deal with a significant number of people and other organizations. Moreover, the ethical and legal aspects are highly intertwined with the daily operations of banks, and the way in which organizations approach issues related to such topics can define their accountability to clients and the community overall.
Modern commercial banks have a wide range of functions because such important areas as commerce, trade, and industry depend on them every day. The three central functions of commercial banks include primary (banking) functions, secondary (non-banking) functions, as well as subsidiary activities (Berger and Bouwman 2015). These functions characterize the nature of transactions being carried out by commercial banks as well as the type of customers with which they engage.
Under their primary functions, commercial banks accept deposits in the form of fixed deposits as well as current and savings deposits. The objective of such a financial transaction is to collect savings from the public, which represent the lifeline of banks that they use in further operations. Demand deposits refer to such that can be withdrawn by their depositors on demand, and no interest is being paid on them (Majaski 2020). Term deposits, however, can only be paid after a specified time period is expired, and they carry a fixed rate of interest. When it comes to the legal and ethical considerations associated with the operations of commercial banks within the primary functions area of accepting deposits, banks are obliged to treat their customers fairly and provide safe and effective services to them (Markel and Selber 2017). When accepting deposits, therefore, banks are expected to guarantee that their customers’ money is safe and secure, and that the services offered are reliable and can be trusted.
Another function of banks is to give loans and advances, which is an area of operations that deals with entrepreneurs and business people, and, therefore, is linked to interest. Giving loans and advances is the primary source of income for commercial banks because they keep a specific section of the deposit with itself and reserve the balance to borrowers as loans in different forms of credit (Federal Deposit Insurance Corporation 2016). Finally, commercial banks engage in investments, mainly in three major securities types, such as government securities, other approved securities, and other securities. Whatever assets are involved in the operations of banks, it is the job of their leaders and managers to ensure that securities in which they invest align with the commitment to ethical conduct (Markel and Selber 2017). When the investments are not viewed well by the public, there are risks to harming the reputation of banks, which leads to further ethical and legal issues.
Commercial banks also engage in discounting bills of exchange, which denote a promise to pay a pre-defined amount of money at a certain point in the future (Hargrave 2020). A bill of exchange often engages three parties, including the drawee, which is the party paying the sum, the payee, which receives the sum, and the drawer, which obliges the drawee to pay the said amount of money. It is often used in international trade to help organizations that import and export goods fulfill their transactions.
Beyond bills of exchange, commercial banks engage in overdraft facilities that represent advances given by allowing bank clients to keep their current accounts while overdrawing it up to an agreed limit (Bank of America 2020). By offering such a service, banks allow their depositors to overdraw amounts higher than the balance amount present on their accounts. Therefore, depositors of current accounts that are being held at banks can make arrangements in the case if a cheque has been drawn without being covered by the deposit, thus making the bank granting an overdraft and honoring the cheque. Such overdrafts can be confused with loans, but there is a distinct difference. In the instance of loans, borrowers pay interest on the amount that has been sanctioned; however, during overdrafts, the borrower is allowed to draw as much as required without any interest (Wait 2020).
Concerning the secondary functions of banks, they perform agency operations for their customers. For instance, they collect bills, cheques, drafts, and other monetary assets deposited by their customers. Another function is making and collecting payments on such transactions as insurance policies, healthcare, or house rent on behalf of their clients. In the same realm, commercial banks can retrieve or accept rents and other deposits in their customer’s names. In a similar area of operations, additional agency functions include accepting bills, remitting funds from one place to another, sending reference letters, as well as purchasing and selling shares and securities.
When they have established trusting connections with customers, commercial banks can take the liability for managing the properties of clients and act as their trustees within the secondary area of functioning. It is essential that banks act by their organizational policies when they are in close relationships with clients and play the role of trustees. There is no room for deception and unethical behavior from both sides as it can lead to potential breaches of contracts and legal problems (Markel and Selber 2017). Apart from the aforementioned functions of agency, commercial banks also offer general services associated with utilities to their clients. For instance, on behalf of customers, banks can issue letters of credit, gift or Travelers’ cheques, provide services on tax consultancy, facilitate easy transfers of funds from a holder to a receiver, deal with transactions of international currency exchange, or make arrangements for goods transport, insurance, and warehousing. Finally, in a highly digitalized environment, modern commercial banks offer such services as issuing debit, credit, and smart cards, providing 24-hour customer support, transferring bank deposits between companies or individuals, and underwriting capital issues. Overall, the functions of banks are highly extensive as the needs and expectations of customers expand. However, from a legal and ethical standpoint, it is essential that banks adhere to both state and international standards not only to maintain their reputation but also to ensure smooth operation and profitability.
Bibliography
Baker McKenzie. 2016. “Global Financial Services Regulatory Guide.” Bakermckenzie.com.
Bank of America. 2020. “Deposit Agreement and Disclosures.” Bankofamerica.com.
Berger, Allen, and Christa Bouwman. 2015. Bank Liquidity Creation and Financial Crises. Cambridge: Academic Press.
Federal Deposit Insurance Corporation. 2016. “Loans.” Fdic.org.
Functions of Commercial Banks.” Theincomparable.yolasite.com.
Hargrave, Marshall. 2020. “Bill of exchange.” Investopedia.com.
Majaski, Christina. 2020. “The Difference Between Term Deposit vs. Demand Deposit.” Investopedia.com.
Markel, Mike, and Stuart Selber. 2017. Technical Communication. Boston: Bedford/St. Martin’s.
Pritchard, Justin. 2020. “Get Up to Speed on the Different Types of Banks.” Thebalance.com.
Wait, Rachel. 2020. “Which is Better – A Loan or an Overdraft?” Forbes.