Chain Banking

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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).

Examples of Chain Banking

  • Bank Holding Companies: Bank holding companies are companies that own multiple banks. These companies are typically owned by a single family or group of shareholders and have the ability to control the operations of the banks they own. For example, JPMorgan Chase is a bank holding company that owns JPMorgan Chase Bank, Chase Manhattan Bank, and BankOne.
  • Regional Banking: Regional banking involves the ownership or control of multiple banks within a certain geographic area. Banks in this type of chain often have a shared ownership structure, with one or more of the banks being owned by the same shareholders. For example, BB&T is a regional banking chain that operates in 12 states in the mid-Atlantic and Southeastern U.S.
  • Cross-Border Banking: Cross-border banking is a type of chain banking that involves the ownership or control of multiple banks in different countries. This type of banking allows for the transfer of capital, products, and services between different countries. For example, HSBC is a cross-border bank that operates in more than 70 countries and territories.

Advantages of Chain Banking

Chain banking can be an efficient, cost-effective way of consolidating banking activities, allowing for economies of scale and better risk management. Below are some of the main advantages of chain banking:

  • Chain banking offers more efficient management of resources, with fewer personnel and infrastructure costs, a result of the consolidation of multiple banks into one group.
  • Chain banking also allows banks to take advantage of the strengths of different banks in the group. For example, a large bank may have the resources to offer a wide range of services, while a smaller bank may have a more specialized knowledge in a certain sector.
  • Chain banking provides greater liquidity and capital, allowing the banks to better manage their risks and provide more services to customers.
  • Chain banking also offers greater convenience for customers, as they can use any of the banks in the group to access their accounts and services.
  • Chain banking allows for better risk management, as the banks in the group can pool their resources and spread their risks. This makes it easier for them to manage their overall risk exposure.
  • Chain banking also offers greater flexibility in terms of operations, allowing banks to quickly respond to economic and market changes.

Limitations of Chain Banking

  • Chain banking has its limitations, including:
  • Lack of Competition: Chain banking does not encourage competition among the different banking institutions, resulting in higher fees for services.
  • Decreased Transparency: Chain banking can lead to a lack of transparency, as the same group of people control multiple banks and may not be required to provide detailed information about their activities.
  • Risk of Collusion: Chain banking can lead to an increased risk of collusion among the banks in a chain, as the same group of people control them. This can lead to higher fees and decreased services for customers.
  • Risk of Over-Concentration: Chain banking can lead to a high level of concentration of assets in a certain area, which can increase the risk of financial distress if the banking institutions in the chain fail.
  • Increased Regulatory Burden: Chain banking can lead to increased regulatory burden for the banking institutions in the chain, as the same group of people control them. This can lead to additional costs for the banking institutions.

Other approaches related to Chain Banking

  • Branch banking: when a bank has multiple branches, each branch is considered a part of the same banking system, allowing customers to access their accounts and services at any branch.
  • Conglomerate banking: when two or more banks are owned by the same company, allowing for a much larger pool of resources and services to be available to customers.
  • Network banking: when two or more banks collaborate to offer services to their customers, such as shared ATMs and the ability to transfer funds between accounts.
  • Virtual banking: when customers conduct banking activities online, either through a bank website or a mobile app.

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. It is a type of banking which has various approaches, such as Branch Banking, Conglomerate Banking, Network Banking, and Virtual Banking. These approaches allow customers to access their accounts and services at any branch, use a much larger pool of resources and services, conduct banking activities online, and collaborate with other banks to offer services to their customers.


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References

Author: Mateusz Wójcik

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