Introduction to Finance

international banking 
when 
banks operate in more than one 
country

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72
C H A PT E R 3 Banks and Other Financial Institutions
The United Kingdom does not restrict its banks from engaging in both commercial bank-
ing and investment banking. However, British banks traditionally have been either “clearing 
banks,” which are similar to U.S. commercial banks, or “merchant banks,” which are similar 
to U.S. investment banks. In recent years, some British clearing banks have formed subsidi-
aries to perform a wide range of investment banking activities. Likewise, merchant banks are 
expanding beyond investment banking. As a result, banking consolidations are taking place 
and the United Kingdom is moving more toward universal banking. Commercial banking and 
investment banking are separated in Japan.
German banks are allowed to own shares of stock in German fi rms and also are permitted 
to vote those shares. Japanese banks also are allowed to own common stock in their business 
customer fi rms, as well as to engage in various cross holdings of stock involving other Japanese 
fi rms and banks. United Kingdom banks are not actively involved with the fi rms that they 
conduct business with. While stock ownership in business fi rms by banks is not restricted in 
the United Kingdom, British banks are generally risk averse to ownership of common stock.
Applying Finance To...
• Institutions and Markets 
Commercial banks, insurance com-
panies, pension funds, and mutual funds play important roles in get-
ting the savings of individuals into the hands of business fi rms so 
that investments can be made to maintain and grow the businesses. 
Thrift institutions (savings and loans, savings banks, and credit uni-
ons) along with commercial banks comprise the banking system and 
help with the fi nancial functions of creating money and transferring 
money, which is conducted largely through a highly effi
cient check 
processing or clearing system. In contrast with commercial banks, 
while thrift institutions also accept the savings of individuals, they 
focus on lending to individuals who want to purchase durable goods 
and homes.
• Investments 
Bank loans to businesses and other debt obligations, 
such as small certifi cates of deposit, originate in the primary debt 
obligations market. However, since they are specifi c arrangements 
with business borrowers and depositors, these debt obligations do not 
trade in a secondary debt obligations market. Rather, business loans 
and small CDs are usually held to maturity, and loans are repaid and 
depositors redeem their CDs. Investment banking fi rms and broker-
age houses help businesses market their new debt and equity secur-
ities issues so funds can be raised in addition to those provided by 
banks.