Unit Banking

• Unit banking refers to many small separate banks which are not connected to one another
• They can be private corporations, or publically traded corporations which have many shareholders
• They often exist in only one geographical area (e.g. Bank of Beverly Hills (city), Bank of Texas (state))

Advantages

• Because they are small, many unit banks get to know their customers very well, and can be more flexible with their loan terms
• Due to the high competition of many unit banks in each city, interest rates charged on loans may be lower, and interest rates paid on savings may be higher

Disadvantages

• High completion leads to smaller profits and an increased chance of bankruptcy if the bank cannot absorb a few large losses, such as a large loan which cannot be repaid (In 1990, 168 U.S. banks failed, and an estimated 1,100 were in serious trouble.  These failures will cost the U.S. government $500 billion in payments to people who have lost their savings)
• Only a limited amount of money is available for loans due to fewer customers having money on deposit
• A major disaster in one area (a hurricane in Florida) may wipe out the bank since many people with loans may not be able to pay back and there are no branches in others areas to help the bank out

Branch Banking

• Branch banking refers to few, very large banks, each with many branches
• Each bank tends to have one head office (note all the bank towers in Toronto) which directs the affairs of the branches
• There are five major banks in Canada:  Royal Bank, CIBC, Bank of Nova Scotia, Bank of Montreal, TD Bank (note The Royal Bank is the largest in Canada)

Advantages

• If one branch is running short of money or needs some expertise, another branch or head office can supply the necessary funds or help
• Depositors can deal with a branch of their bank no matter where they go in Canada (and in some cases, other countries)

Disadvantages

• Local branch managers are told what rates to set and policies to follow by the head office, there is little room for independence
• Fewer banks means less competition, and this may mean lower rates paid on savings and higher rates changed on loans