Chain banking is a system where one small group of people is controlling completely or at least majority of two or more banks being chartered independently. Usually the controlling sides are heads or majority shareholders of interlocking directorates. So in effect there are few banks functioning independently in the absence of conventional obstacles that go along with holding any company.
In “Chain Banking: Stockholder and loan links of 200 largest member banks (...)” we can read that chain banking also can be „any community of interest or links among banks arising directly or indirectly from stock ownership”(1963). Those „links in the chain” may include: insurance companies, savings banks, brokers and other organisations. Another form of chain relationship may be formed by securing bank loans and by holding stock in other banks.
Direct and indirect controls
According to McChesney Martin, Jr., in the U.S. Congress house, Committee on Banking and Currency (1963) if we want to understand chain banking deeply, we need to take a closer look at direct and indirect controls. Direct controls would occur when the same individual or group of people is stockholding two or more banks. Indirect controls on the other side have nothing to do with stock ownership records, but they manifest themselves in a situation when a massive bank is supplying funds of an individual for the purchasing stock basis in a bank, while at the same time is taking back the capital of a smaller bank. This shows very directly that in this case, larger banks can have effective control over smaller banks.
Chain banking aspects
Other aspects of chain banking One of the advantages of chain banking is that it reduces the risk for the customer. The connection between the banks means that the risk is spread between several institutions. This connection also means that financial operations are streamlined. On the other hand, this means less competition. Less competition means less choice for the customer. The centralization of financial system is one of the main disadvantages of chain banking.
Other forms of bank governance
Chain banking is one of a few banking systems that can be observed on the market. Other systems also have their distinctive characteristic (Mengle, 1990):
Branch banking occurs when one bank runs specified number of offices.In holding company banking, one corporation exercises control as an owner or just an operator of two or more subsidiary banks.
Group banking is a system of combined banks existing under one head bank holding company.
Interstate banking occurs when banking expands across state lines. It leads to the formation of regional and national banking chains. Interstate banking surge has led to the decline of chain banking. Almost all interstate bank expansion happens through bank holding companies
Unit banking is a practice in which a single, independent bank operates on a local scale. Banks like this are usually small and don't have any connected departments. Investment banking relates to the creation of capital for entities such as companies, governments, etc. Investment bank services can “securities underwriting and corporate finance advisory services” (Rhee, 2010).
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- Mengle, D. (1990). The case for interstate branch banking, FRB Richmond Economic Review, 76(6), 3-17.
- Rhee, R. J. (2010). The decline of investment banking: Preliminary thoughts on the evolution of the industry 1996-2008, J. Bus. & Tech. L., 5, 75.
- Ritter, J. R. (2003). Investment banking and securities issuance, In Handbook of the Economics of Finance (Vol. 1, pp. 255-306). Elsevier.
- Sproll, M. (2013). Precarization, Genderization and Neotaylorist Work: How Global Value Chain Restructuring Affects Banking Sector Workers in Brazil.
- U.S. Congress House, Committee on Banking and Currency. (1963). Stockholder and Loan Links of 200 Largest Member Banks, House Banking and Currency Committee.
Author: Mateusz Wójcik