Banks that want to succeed in today’s business environment would be best served not by relying solely

on a charismatic leader or pair of leaders, but by finding better ways to collaborate. This reflects changes
in society generally.

Individuals have typically been credited with making great progress in history — from the Mona Lisa to
Beethoven’s Fifth to the general theory of relativity. But is this progress due to the work of lone geniuses
or due to the collaboration of many talented individuals? Art is one case in point: The Dutch painter
Rembrandt was once credited with many works of art that have more recently been attributed to others
working in his studio — an overdue nod to the power of collaboration.

Today there is a strong case to be made that the greatest progress and most effective decision-making
are being propelled by neither the lone genius nor even the partnership of two great minds (for
example, Crick and Watson, Lennon and McCartney) but by the collaboration of many minds.

In fact, the speed of change, in terms of technology and business models, is so rapid that only by
leveraging a much wider network of intelligence is it possible to stay ahead of the curve.

This collaboration can take many forms, and banks can take advantage of two major assets:
interdependent networks and open source systems.

Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a safe
place to store extra cash and credit. They offer savings accounts, certificates of deposit, and checking
accounts. Banks use these deposits to make loans. These loans include home mortgages, business loans,
and car loans.

Banking is one of the key drivers of the U.S. economy. It provides the liquidity needed for families and
businesses to invest in the future. Bank loans and credit mean families don't have to save up before
going to college or buying a house. Companies use loans to start hiring immediately to build for future
demand and expansion.

How It Works

Banks are a safe place to deposit excess cash. The Federal Deposit Insurance Corporation (FDIC) insures
them.1 Banks also pay savers interest rates or a small percent of the deposit.2
Banks can turn every one of those saved dollars into $10. They are only required to keep 10% of each
deposit on hand. That regulation is called the reserve requirement.3 Banks lend the other 90% out. They
make money by charging higher interest rates on their loans than they pay for deposits.

Types of Banks

Commercial banks provide services to private individuals and to businesses. Retail banking provides
credit, deposit, and money management to individuals and families.

Community banks are smaller than commercial banks.4 They concentrate on the local market. They
provide more personalized service and build relationships with their customers.

Internet banking provides these services via the world wide web. The sector is also called E-banking,
online banking, and net banking. Most other banks now offer online services. There are many online-
only banks. Since they have no branches, they can pass cost savings onto the consumer.

Savings and loans are specialized created to promote affordable homeownership.5

Credit unions are owned by their customers.6 This ownership structure allows them to provide low-cost
and more personalized services. You must be a member of their field of membership to join. That could
be employees of companies or schools or residents of a geographic region.

Investment banking finds funding for corporations through initial public stock offerings or bonds. They
also facilitate mergers and acquisitions. Third, they operate hedge funds for high net worth individuals.
The largest U.S. investment banks are Bank of America/Merrill Lynch, Citi, Goldman Sachs, J.P. Morgan,
and Morgan Stanley. Large European investment banks include Barclays Capital, Credit Suisse, Deutsche
Bank, and UBS.7

After Lehman Brothers failed in September 2008, signaling the beginning of the global financial crisis of
the late-2000s, investment banks became commercial banks.89 That allowed them to receive
government bailout funds. In return, they must now adhere to the regulations in the Dodd-Frank Wall
Street Reform Act.

Merchant banking provides similar services for small businesses.10 They provide mezzanine financing,
bridge financing, and corporate credit products.11

Sharia banking conforms to the Islamic prohibition against interest rates.12 Also, Islamic banks don’t
lend to alcohol, tobacco, and gambling businesses.13 Borrowers profit-share with the lender instead of
paying interest.1415 Because of this, Islamic banks avoided the risky asset classes responsible for the
2008 financial crisis.16

Central Banks Are a Special Type of Bank

Banking wouldn't be able to supply liquidity without central banks. In the United States, that's the
Federal Reserve. The Fed manages the money supply banks are allowed to lend. The Fed has four
primary tools:

Open market operations occur when the Fed buys or sells securities from its member banks. When it
buys securities, it adds to the money supply.

The reserve requirement lets a bank lend up to 90% of its deposits.

The Fed funds rate sets a target for banks' prime interest rate. That's the rate banks charge their best
customers.

The discount window is a way for banks to borrow funds overnight to make sure they meet the reserve
requirement.

In recent years, banking has become very complicated. Banks have ventured into sophisticated
investment and insurance products. This level of sophistication led to the banking credit crisis of 2007.

How Banking Has Changed

Between 1980 and 2000, the banking business doubled. If you count all the assets and the securities
they created, it would be almost as large as the entire U.S. gross domestic product. During that time, the
profitability of banking grew even faster. Banking represented 13% of all corporate profits during the
late 1970s. By 2007, it represented 30% of all profits.
The largest banks grew the fastest. From 1990 to 1999, the 10 largest banks' share of all bank assets
increased from 26 to 45%. Their share of deposits also grew during that period, from 17 to 34%. The two
largest banks did the best. Citigroup assets rose from $700 billion in 1998 to $2.2 trillion in 2007. It had
$1.1 trillion in off-balance sheet assets. Bank of America grew from $570 billion to $1.7 trillion during
that same period.

How did this happen? Deregulation. Congress repealed the Glass-Steagall Act in 1999. That law had
prevented commercial banks from using ultra-safe deposits for risky investments. After its repeal, the
lines between investment banks and commercial banks blurred. Some commercial banks began
investing in derivatives, such as mortgage-backed securities. When they failed, depositors panicked. It
led to the largest bank failure in history, Washington Mutual, in 2008.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed constraints on
interstate banking. It allowed the large regional banks to become national. The large banks gobbled up
smaller ones.

By the 2008 financial crisis, there were only 13 banks that mattered in America. They were Bank of
America, JPMorgan Chase, Citigroup, American Express, Bank of New York Mellon, Goldman Sachs,
Freddie Mac, Morgan Stanley, Northern Trust, PNC, State Street, U.S. Bank, and Wells Fargo. That
consolidation meant many banks became too big to fail. The federal government was forced to bail
them out. If it hadn't, the banks' failures would have threatened the U.S. economy itself.

TABLE OF CONTENTS

EXPAND

How It Works

Types of Banks

Special Type of Bank

How Banking Has Changed

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