Anatomy of a bank

Paul Hickman, president and CEO of the Arizona Bankers Association, sat down with Arizona Business magazine to dissect the anatomy of a bank and what makes the industry click.

What is the model of a bank?
The fundamental business model of a bank is to give customers a safe, secure place to deposit their earnings and savings, and to lend money to borrowers for small businesses, homes, education, cars, etc. . . .  Banks pay interest on deposits and charge interest on loans.

Why do banks need to make a profit?
Like most other business enterprises, if banks are not profitable they cannot sustain themselves and stay in business. Additionally, their deposits are insured by the FDIC, which is funded by bank premiums.  A bank that continuously loses money would become uninsurable and lose its charter.

What is a common misconception about banks?
One of the most common misconceptions is that banks don’t need to charge fees for certain services. A prime example is the fees card issuers charge merchants for debit card transactions.  The fees support a safe, secure, ubiquitous medium of exchange that operates 24/7, on a global scale.

Who establishes and enforces the regulations that banks have to follow?
A bank’s primary regulator is determined by whether it is a commercial or savings institution and whether it has a national or state charter.  The primary federal regulatory agencies are the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve.  Additionally, every state has a regulatory agency that oversees state chartered banks.

What regulatory structures inhibit banks’ flexibility in modifying loans?
Banks are required to maintain certain risk-weighted asset to capital ratios.  Once a loan is modified it must be reclassified at a higher risk weight, requiring more capital.  Given the current challenges many firms are facing raising capital, this regulatory structure can act as a disincentive to modify loans.


About Michael Gossie

Michael Gossie is an award-winning journalist who has earned more than 50 awards for writing, editing and design. He studied economics at Elmira College in Elmira, N.Y., and put his entrepreneurial spirit to work in 2007, using a 200-year-old family recipe to launch an Italian sauce company. He is a competitive marathon runner, Ironman triathlete and is most proud of being the founding president of the Steuben Arc Foundation in Upstate New York, which serves individuals with developmental disabilities, including his sister.