Banker’s Bank – Definition

Cite this article as:"Banker’s Bank – Definition," in The Business Professor, updated January 24, 2020, last accessed October 28, 2020, https://thebusinessprofessor.com/lesson/bankers-bank-definition/.

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Bankers’ Bank Definition

A bankers’ bank is a type of bank that transacts with other banks, this bank only provides financial services to other banks. A banker’s bank is often larger than the normal bank, established financial institutions create this type of banks.

Unlike commercial banks that render services to the public such as the issuance of loans, acceptance of deposits and others, a banker’s bank interacts only with banks and not the general public.

A Little More on What is a Bankers’ Bank

The services provided by a banker’s bank are similar to those offered by traditional and commercial banks. The only difference is that banker’s banks do not relate directly with customers, instead, they were created to support other banks.

The first banker’s bank was established in Minnesota in 1975, this bank provided support for community banks and helped them operate effectively. Presently, there are 22 banker’s banks providing support for banks in 48 states.

Bankers’ Bank and Credit Unions

The roles of a banker’s bank are similar to that of a credit union, however, both have different services they offer and run on different structures. Credit unions and Banker’s banks perform higher roles than commercial or community banks.

The major difference between these two types of financial institutions is that a credit union is owned by members who pool their funds in the form of deposits to pursue the interest of the union. Also, credit unions are not-for-profit organizations serving the interest of its members, while a banker’s bank is aimed at generating profit for shareholders. A credit union can be created by a volunteer organization, employees, associates and affiliates who have the same interest.

Example of a Bankers’ Bank

Wisconsin is the most common example of a banker’s bank in the United States. This bank was established in 1993 to offer a variety of services to community banks as a way of supporting them and helping them function effectively. Some of the products that Wisconsin offered to other banks at this time include federal funds, secondary mortgage, portfolio accounting, underwriting, investment trading and orders.

It is important to note that a banker’s bank does not compete with commercial banks for customers, it was clearly established to provide services to other banks.

Reference for “Bankers’ Bank”

https://en.wikipedia.org/wiki/Bankers%27_bank

https://www.bankersbank.com/

https://en.wikipedia.org/wiki/Bankers%27_bank

https://www.thebankersbank.com/

https://www.investopedia.com › Personal Finance › Banking

Academics research on “Bankers’ Bank”

Competitive banking, bankers’ clubs, and bank regulation, Dowd, K. (2013). Competitive banking, bankers’ clubs, and bank regulation. In Money and the Market (pp. 54-70). Routledge.

The politics of central bank independence, Goodman, J. B. (1991). The politics of central bank independence. Comparative Politics23(3), 329-349.

The effect of bank reputation on the value of bank loan agreements, Johnson, S. A. (1997). The effect of bank reputation on the value of bank loan agreements. Journal of Accounting, Auditing & Finance12(1), 83-100. I examine the effect of bank characteristics on changes in client firm value occasioned by bank loan announcements to assess the importance of commercial bank reputation. I find that valuation effects are positively related to bank deposit size and capital ratio, and inversely related to the loan loss provision ratio. The results imply that high-quality firms that need to raise external capital have an incentive to develop relationships with large, high-quality banks to avoid pooling with other bank loan customers or issuers of public securities. The results suggest that, despite regulation, the market does not view banks as a uniform set of suppliers of capital. Instead, in a manner consistent with previous empirical findings for auditing firms and investment bankers, variation among commercial banks facilitates the market’s ability to differentiate among firms.

From Soft and Hard-Nosed BankersBank Lending Strategies and the Survival of Financially Distressed Firms, Höwer, D. (2009). From Soft and Hard-Nosed Bankers–Bank Lending Strategies and the Survival of Financially Distressed Firms. ZEW-Centre for European Economic Research Discussion Paper, (09-059). Public banks face a public contract to provide credit access to firms and households within their business district. Closely related to that, cooperative banks aim to support their members. Both are asked to finance projects as long as economically sustainable. Bank owners grand additional payment that reduce refinancing costs. It is argued, that private banks are disadvantaged due to these refinancing cost differentials and competition is distorted. While the strategy set of public and cooperative banks is fixed, private banks are free to choose which strategy they want to apply. In this paper I analyze, whether private banks adopt a different lending strategy. If private banks act as “hard-nosed” bankers as firms become financially distressed, the probability of market exit should be higher compared to firms financed by public or cooperative banks. In order to test this empirically probit models are employed estimating the probability of market exit for firms that became financially distressed in the years between 2000 and 2005. A Heckman variation of the probit model controls for potential selection bias due to the data generating process. Information on firm’s financing behavior, entrepreneurial education, as well as internal and external factors influencing a firm’s market exit are used as covariates. Results show that firms with a savings or a cooperative bank as their main bank present a lower probability of exiting the market than those with private banks. The reasons for different lending strategies remain unclear. A possible explanation would be that private banks adopt stricter rules when firms become financial distressed. Private banks could ask for additional control rights or rule out renegotiation in general. Private banks credit portfolio risk reduces indirectly if high-risk firms anticipated the behavior of the private banks and self select to public or cooperative banks. But the approximated credit portfolio risk by bank types, based on firms credit rating scores, indicate that private banks bear higher risk compared to public or cooperative banks.

The Bank for International Settlements and the Debt Crisis: A New Role for the Central Bankers‘ Bank, Bederman, D. J. (1988). The Bank for International Settlements and the Debt Crisis: A New Role for the Central Bankers’ Bank. Int’l Tax & Bus. Law.6, 92.

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