Bankers Bank

Bankers Bank
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Methods and techniques

Bankers' Bank is a term which has two different meanings in banking sphere. It can be used both to define business cooperative established by community banks and also with regard to the central banks, but rather to one of their functions. What is interesting, in spite of the obvious differences these two branches are similarly vulnerable to the impact of the informatical technology.

Bankers' bank as a business cooperative[edit]

Bankers' bank is a term coined to define a specific type of bank, which have appeared in the bank industry in the mid-1970s. This financial institution is a business cooperative arranged by community banks to become independent from previous necessity of correspondent banks' intermediary in some services. The main factor, which enabled this veritical intergration was the increasing cost of collaboration with correspondent banks, which was due to deregulation and technological change. In addition, community banks had to deal with correspondent banks not only as suppliers, but also competitors. Therefore the idea of joining a banker' bank appeared in bank industry. The community banks connected in this cooperative avoid dealing with correspondent banks and thus providing information about their customers. Thus institution of bankers' bank become very important for community banks' competitiveness on the market. Interestingly, some researchers claim that such mergers of organizations fit into theory of Economic Darwinism, especially as an effective innovation concept. It should be also mentioned that bankers' bank services obviously do not include retail banking operations (J. A. Brickley, J. S. Linck, C. W. Smith 2012, pp. 113-114).

Bankers' bank as a function of central banks[edit]

This term can be also used in refence to central banks, because bankers' bank is one of their main functions. However, in the light of their multifaceted activity, which includes remaining functions such as:

  • issuing currency,
  • conducting monetary policy,
  • regulating commercial banks,
  • lending the last resort,

it has to be highlighted that, in the case of the central banks, the term 'bankers' banks' is not fully representative (L. H. White 2001, p. 219). Therefore to emphasis this complex character of central banks and their dual role in the bank industry, they should be defined not only as bankers' banks, but also government's banks (Ch. Goodhart, R. Lastra 2018, pp. 49-68).

Nevertheless, it is said that in today's highly computerized times the significance of central banks is still decreasing, also in the field of a bankers' bank role, which especially means providining various financial transactions between commercial banks and keeping their account balances as reserves. In the U.S. commercial banks have to pay expensive taxes for this services provided by Federal Reserve System (FED), therefore, to reduce the amount of required money, they apply an information technology, which provides an alternative cash flow beside central bank (L. H. White 2001, p. 219).

Furthermore, central banks' role as bankers' banks was caused by the process of nationalization and imposing legal restrictions on private providers. According to Walter Bagehot, the banking authority from the 19th century who had summarized this process in refence to Bank of England, banker's bank function overtaken by central bank mainly was a result of accumulating legal priviliges by this institution. Moreover, some reserchers claim that central banks are not enough efficient in this field what could be explained in some way by the character of that process (L. H. White 2001, p. 221).


Author: Agnieszka Wierzba