U.OL Defining “Commercial Banking”

“Commercial banking” was defined in the previous edition of this book as the activity of a banking institution whose “principal business is to accept deposits, make loans, collect commercial paper, and arrange the transfer of funds.” Under the banking law from the adoption of the Glass-Steagall Act in the 1930s until the beginning of the 1980s, there was a distinct demarcation between commercial banks and other financial institutions, such as investment banks, securities firms, and commercial financial services conglomerates.

AH this is changing. The types of institutions that can engage in traditional commercial banking functions have enlarged as a result of legislation giving additional powers to thrift institutions. The types of activities commercial banks engage in have expanded as a result of legislation at both the state and federal levels and as a result of judicial decisions dismantling parts of the wall erected by the Glass-Steagall Act to keep commercial banks insulated from the risks of dealing in securities. The “nonbank bank” explosion has started a restructuring of the banking market into holding companies capable of offering an array of financial services. In light of these developments, perhaps the most suitable definition is one offered by an English texi: “[B]anks come in all shapes and sizes, with different name tags applied indifferent countries, often quite loosely. Banks make most of their money from the difference between interest rates paid to depositors and charged to borrowers.” Commercial banks are “publicly quoted and profit oriented. They deal directly with the public, taking deposits, making loans and providing a range of financial services from foreign exchange to investment advice. Most countries have settled for between four and ten;” but in the United States there are nearly 15,000 because of “banking laws that have prevented banks operating in more than one state, and in different types of business,..

In addition to commercial banks, there are many specialized depository institutions that have been established to perform specialized roles. Thrift insti­tutions such as savings and loan associations and credit unions are important examples. At their inception, savings and loan associations primarily engaged in home mortgage lending and offering passbook-type savings to consumers. With the enactment of the Depository Institutions Deregulation and Monetary Con­trol Act of 1980, thrifts gained expanded authority to engage in commercial banking activities. Further incorporation into the general banking market has occurred as a result of the restructuring brought about by the financial failures and weakened condition of thrift institutions in the 1980s, which led to changes in the law to encourage the acquisition and merger of weak institutions with stronger financial institutions, including banks. To a great extent, thrift institutions are subject to a regulatory regime similar to that governing commercial banks, and engage in banking functions similar to those of commercial banks. Subsequent chapters discuss how thrifts fit into this regulatory scheme.

There are other specialized consumer-oriented financial companies. Credit unions may be organized under state and federal statutes with the power to maintain customer share accounts against which drafts may be drawn payable i n a manner similar to checks. There are also personal finance loan organizations authorized under the laws of the several states that loan small amounts of money to consumers, often at specially regulated rates that are higher than the usual interest rates allowed. These organizations normally are not deposit-taking institutions but operate with their own capital and credit. Banks often have their own small loan depart­ments to make the same type of loans, and holding companies may have special consumer loan subsidiaries or affiliate companies.

Although trust activities have become a part of the activity of many com­mercial banks,1 this book does not deal with the laws that govern these trustee relationships and activities. The competition for funds has led some banks to offer managed investment accounts through their trust departments similar to those offered by mutual funds and other securities firms. Again, there are trust companies organized under state law that operate by accepting money for the purpose of investment where the beneficial interest in the funds remains in the original owner.

There are other types of banking functions and specialized banks: for exam­ple, reserve banks, which are really bankers’ banks; investment banks, whose chief business is underwriting and dealing in securities, and providing financial advice and aid in corporate acquisitions and mergers; agricultural banks; foreign trade banks; and other specialized banks that have charters to engage in particu­lar types of business. Further, the peculiarities of federal laws regulating bank holding companies have encouraged the proliferation of various financial institutions that have been chartered as full-service banks but that limit their functions to activities such as consumer lending and credit card operations.

Because of the diversity of functions of commercial banks and the variety of depository institutions involved in them, this book does not attempt a compre­hensive survey of all banking activity. Rather, it emphasizes the basic regulatory structure that governs traditional commercial banking institutions and the com­mercial activities associated with accepting deposits, collecting commercial paper, making payments and transferring funds, and engaging in certain credit transactions.

As this introduction indicates, the laws and regulations that govern com­mercial banking are numerous and complex. The various types of financial institutions engaging in commercial banking activities are matched by an equal activities. The Depository Institutions Deregulation and Monetary Control Act of 1980 also gave thrift institutions chartered by the Federal Home Loan Bank Board the author­ity to engage in trust activities under certain conditions. 12 USC § 1464(n) (1982).

In addition, the law governing the transactions of commercial banks is complex. The Uniform Commercial Code has brought a desirable uniformity to the law in many areas, but there are many special purpose statutes, frequently intended to give special consumer protection, that must be taken into account in analyzing banking transactions. There is a growing body of federal law that must be considered along with the state commercial law of the UCC and common law. This book is intended to serve as a beginning guide for the bank officer engaged in these commercial banking transactions and the attorneys called upon to advise in banking matters. It is not a substitute for careful legal counsel, how­ever, and such assistance should be obtained because this book can neither cover all the details applicable in particular matters, especially at the regulatory level, nor report on all the local variations, changes, and new developments. More­over, the facts of a particular situation will vary in ways that may introduce new legal problems or otherwise affect the legal analysis. Obtaining the advice of competent legal counsel is essential.