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What Is Chain Banking?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 August 2014
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Chain banking is a situation in which three or more banks that are independently chartered are controlled by a small group of people. The mechanisms used to establish this type of arrangement normally involve securing enough stock between the individuals to have a controlling interest in each of the bank corporations involved. The arrangement can also be managed with the establishment of interlocking directorates or boards of directors that effectively create a network between the banks without the need for some type of central holding company.

The concept of chain banking is different from group banking, in that the entities involved in the chain bank arrangement remain autonomous and are not owned by a single holding company. By contrast, the group banking model requires a holding company to own all the banks involved, effectively creating an umbrella under which all the banks operate. Chain banking is also different from branch banking, a situation where all local branches of a bank are owned by a single banking institution.

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In years past, chain banking afforded several benefits for investors. The strategy made it possible to earn steady returns from several banks that operated in the same community, without any fears of a great deal of competition from other banks in the area. The network approach made it possible for investors to use their cumulative influence to keep bank services and their attendant fees similar from one enterprise to another, thus ensuring that returns remained consistent. The chain banking process also made it possible for investors to create a network where each bank in the chain served a different part of the market within the area. For example, one bank may focus on business accounts while another specialize in personal accounts, and the third bank in the chain provided services related to the purchase and sale of securities.

Over time, the chain banking approach has become less popular in a number of nations. This is due to changes in banking laws in many places that helped to redefine the process of interstate banking as well as international banking. This redefinition has made it possible for some banks that were once somewhat restricted in what they could offer customers to be able to offer a wider range of services. With more liberalized banking laws in many jurisdictions, the benefits afforded by the chain banking model can now be realized using other approaches, sometimes with a greater degree of efficiency and without the need for establishing this type of investor network.

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indemnifyme
Post 2

@JessicaLynn - You may be right about chain banking. Or maybe not. I know a lot of people are getting tired of the huge national banks. I wouldn't be surprised if we saw a resurgence of local banking in the next few years.

I think the whole concept between chain banking is interesting, either way. I imagine that chain banking isn't always easy. The way I understand it, banks involved in chain banking didn't start out that way. They began as independent banks and then a certain group of people managed to secure controlling shares in the bank. This sort of reminds me of a corporate takeover!

Just as corporate takeovers don't always go smoothly, I bet chain banking doesn't in the beginning either!

JessicaLynn
Post 1

I've never heard of chain banking, so I wasn't surprised to read that it's not that popular anymore. I think in this country, we're definitely moving towards group banking with just a few different bank companies. The mergers that have gone on in the last few years are just staggering.

Anyway, I can see how the chain banking system would work extremely well on the local level, at least. As the article said, it cuts down on competition, as long as the chain offers enough different services to the community.

Still, I think this type of banking will probably totally die out over the next few years.

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