The Impact of Retail Banks on the United States Economy and Customers

Banking CIO Outlook | Monday, July 25, 2022

The majority of the largest American banks have retail banking operations. Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup are included. Retail banking accounts for fifty to seventy-five percent of these banks' overall revenue.

FREMONT, CA: Individuals and families have access to retail banking services. Credit, deposits, and money management are the three most vital functions.

First, retail banks provide credit for the purchase of homes, automobiles, and furnishings. Included among these are mortgages, auto loans, and credit cards. Approximately 70 percent of the U.S. economy is fueled by consumer spending. This provides additional liquidity to the economy. Credit enables individuals to spend their future earnings today.

Second, retail banks provide a secure location for depositing money. The rate of return on savings accounts, certificates of deposit, and other financial instruments are superior to that of hiding money under a mattress. The banks base their interest rates on the federal funds rate and the interest rate on Treasury bonds. These fluctuate with time. The Federal Deposit Insurance Corporation insures a majority of these deposits.

Thirdly, retail banks provide consumers with checking accounts and debit cards to manage their money. Customers are not required to conduct all transactions with cash and coins. All of this is possible online, which makes banking even more convenient.

Retail banks provide loans with depositors' funds. Banks impose more excellent interest rates on loans than they pay on deposits to generate a profit. This is how they generate income.

The Federal Reserve, the United States's central bank, controls most retail banks. One of the Fed's regulatory powers is to force banks to hold a minimum proportion of their deposits in a Fed account. They must meet the Federal Reserve's reserve requirement or restrict business expansion.

Some banks can fall short of the Fed's reserve requirement after each day. However, this is typically not an issue because banks with additional reserves will lend them the difference to cover the gap. The borrowed money is known as "federal funds." The average rate at which they are lent is known as the "fed funds rate." This rate is closely related to the "discount rate," which is the interest rate charged by the Fed on overnight loans.

The discount rate is the only rate set by the Fed. The Fed seeks to convince banks to maintain the Fed funds rate target range. As the discount rate fluctuates, so do the Fed funds rate and overnight and short-term lending rates to bank customers.

The retail banking sector creates the money supply in the economy. To ensure proper conduct, the Fed also regulates this. It determines the interest rate banks lend fed funds to one another. This is known as the fed funds rate. This is the world's most important interest rate. Why? All other interest rates are based on this rate. If the federal funds rate increases, so do all different interest rates.

On the secondary market, most retail banks sell mortgages to large banks. They maintain their substantial deposits. Consequently, they were spared the worst effects of the 2007 banking crisis.

Weekly Brief

Read Also