Bankers Bank

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

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 integration 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

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 privileges by this institution. Moreover, some researchers 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).

Examples of Bankers Bank

• The first example of a Bankers Bank is the Federal Reserve System. The Federal Reserve is the central banking system for the United States, and it performs several functions to help ensure the stability of the U.S. economy. It supervises and regulates the banking system, monitors the money supply, and acts as the lender of last resort.
• Another example of a Bankers Bank is the Central Bank of India, which is the central bank of the Indian economy. The Central Bank of India has the responsibility to maintain the stability of the Indian economy and ensure its growth. It does this by setting policies regarding interest rates, exchange rates, and money supply, as well as by acting as a lender of last resort.
• A third example of a Bankers Bank is the Bankers Association of the United States (BAUS). BAUS is a cooperative of community banks that serves as a resource for its members. It provides educational resources, advocacy services, and access to capital to its member banks, as well as helping its members to stay informed and up-to-date on banking regulations and trends.

Advantages of Bankers Bank

One of the major advantages of Bankers Bank is its ability to offer services to its members that they would otherwise be unable to easily access. These services include:

• Financial advisory services - Bankers Banks offer specialized financial advisory services that can help with risk management and capital planning. Additionally, they can offer guidance on how to best utilize available resources.
• Transaction processing - Bankers Banks have the ability to process large transactions quickly and securely. This can be especially helpful for smaller banks, which may not have the resources to process complex transactions on their own.
• Consolidation of funds - Bankers Banks can offer assistance in consolidating funds from multiple accounts into a single account. This can help reduce the cost of managing multiple accounts and provide more flexibility in managing resources.
• Loan origination - Bankers Banks can help originate loans for their members, which can be very helpful for lenders that don’t have the resources to do so on their own.
• Investment services - Bankers Banks can provide investment services for their members, such as portfolio management and asset management. This can help members maximize the returns on their investments.
• Research and analysis - Bankers Banks can offer research and analysis to their members, which can help them make informed decisions on investment and loan opportunities.

Overall, Bankers Banks offer a wide range of services to their members which can help them increase their efficiency and profitability.

Limitations of Bankers Bank

A Bankers Bank is a financial institution with the specific purpose of providing services to other banks. Despite their usefulness, they are not without their limitations. These limitations include:

• Poor Accessibility: Bankers Banks are typically not open to the general public, so customers must be banks or credit unions in order to obtain services. This limits the accessibility of the services offered by Bankers Banks.
• High Costs: Because of the specialized services offered, the costs associated with using Bankers Banks can be high. This can make them prohibitively expensive for some banks and credit unions.
• Limited Services: Bankers Banks often focus on a limited number of services. This can make it difficult for banks and credit unions to find the services they need.
• Regulatory Limitations: Bankers Banks are subject to the same regulations as other banks. This means that they may be limited in the services they can offer and the products they can provide.
• Technological Limitations: Bankers Banks may not have access to the latest technology, which can limit their ability to provide the most up-to-date services.

Other approaches related to Bankers Bank

In addition to the two main meanings of Bankers Bank, there are other approaches related to them:

• Federal Reserve: The Federal Reserve serves as a banker's bank, providing services such as check clearing, cash management, and discount loans.
• Reserve Bank: A Reserve Bank is a government-owned institution that serves as a banker's bank. It provides services such as credit, lending, and deposit-taking.
• Central Bank: A Central Bank is a government-owned institution that serves as a banker's bank. It provides services such as currency exchange, foreign exchange, and credit facilities.
• Mutual Banks: Mutual Banks are cooperatives owned by a group of members who pool their resources to provide banking services. They are typically used by small businesses and serve as a banker's bank.

In summary, Bankers Bank has a variety of meanings, from the Federal Reserve to Mutual Banks. Each type of banker's bank has its own unique services and functions, which all serve to provide banking services to customers.

Bankers Bank — recommended articles

Corporate agent — Bridge Bank — Universal banking — Capital Base — Chain Banking — Business correspondent — Money emission — Cash pooling — Parallel economy

References

• Bibow J. (2000), On exogenous money and bank behaviour: the Pandora's box kept shut in Keynes' theory of liquidity preference?, "The European Journal of the History of Economic Thought", Vol. 7, pp. 532-568
• Brickley J. A., Linck J. S., Smith C. W. (2012), Vertical integration to avoid contracting with potential competitors: Evidence from bankers’ banks "Journal of Financial Economics", Vol. 105, pp. 113-130
• Dowd K. (2001), Money and the Market: Essays on Free Banking, Routledge, London - New York, pp. 40-56
• Goodhart Ch., Lastra R. (2018), Populism and Central Bank Independence, "Open Economies Review", Vol. 29 (February 2018), pp. 49-68
• White L. H. (2001), In What Respects Will the Information Age Make Central Banks Obsolete? "Cato Journal", Vol. 21, No. 2 (Fall 2001), pp. 219-226

Author: Agnieszka Wierzba