Agent Bank, also known as Agency Bank is very crucial for other banks or entities. These banks represent the mother bank or the business entity in some capacity. Agent banks are not like other commercial or investment banks. They are different in many stages.
However, to understand the prospect of Agent banks, we need to separate the motive of it from conventional banking. We are going to discuss more on the upcoming segments. So, stick right here with us as we discuss the definition and the functions of Agent Banks.
What is an Agent Bank?
Picture it like this, you are a commercial entity or a business that aims to spread its operations overseas. However, financial transactions and services on foreign soil can be very complex. In such cases, big businesses and even banks hire an agent. These agents act as a bank, on behalf of those organizations.
These are Agent or Agency Banks. An agent bank performs a set of financial services on behalf of a business, a set of businesses, personal entities, or a group of banks. The initial motive of establishing such a financial institute is to deal with financial transactions done on foreign soil.
How Many Types of Agent Banks Are There?
There are three distinct types of agent banks. Each type fulfills the specific needs of its clients. Now, speaking of clients, there can be three types. These are:
- Foreign Banks
- Investment Syndicates
- Business or Personal Entities
Foreign banks don’t comply with US Federal Rules and regulations. However, to do business on US soil, they seek assistance from agent banks enlisted under Federal Reserve.
Investment syndicates often require financial services. Hence, they also hire agent banks so that the affairs can be settled accordingly. Lastly, the business and personal entities often face huge financial transaction trails that suit best for handlers like agent banks.
Speaking of assistance, here are the three types of agent banks.
Foreign Agent Banks
Foreign agent banks conduct their business affairs on US grounds, representing a foreign bank. The reason behind this is that foreign banks don’t comply with the Federal Reserve regulations.
To do business, they need to appoint a party that has the legitimacy to do business in US territories. These entities are audited by the Federal Reserve on an annual basis. The biggest advantage is that they can access check-clearing privileges and discount windows.
Investment Banks
Yes, investment banks also can act as agent banks for other financial entities. Especially when a syndicate of banks or other business entities are looking for financial services like syndicated loans.
Now syndicated loans are offered to multiple parties involved in lending funds to the issuer. Here, the investment bank acts as a syndicate manager. They are entitled to contact both parties to ensure a smooth transaction. All the modes are managed by the investment bank itself.
Investment banks do all the auditing and paperwork for the parties to sanction a syndicated loan. In return, they receive their agency fees. Now, sanctioning a loan doesn’t end all the responsibilities of the agent bank. They also have to ensure safe return policies.
Third-Party Agent Banks
Imagine that you own a business that may need financial assistance to launch a new feature or service. In such cases, you might partner with a bank, so that the bank can conduct those financial services on behalf of your business.
These services and assistance are very common, especially when financial transactions are in play. E-commerce companies are perhaps the biggest example of hiring third-party agent banks. These banks handle all the financial transactions and credit card issuance for the client.
In return, they charge the business entity a fee. On the other side of the spectrum, lending clubs and private lenders often tie up with third-party banks to ensure further growth in the online lending business.
Features and Services of Agent Banks
You see, agent banks can be flexible in terms of providing their clients with financial solutions. One of the biggest features of agent banks is providing local banking services. Another possible aspect arranging loans. Lastly, handling huge financial transactions or trials can be another perspective.
These are perhaps some of the major features of agent banks. So, we will be looking into these features.
Providing Local Banking Services: Now, if a foreign bank wants to do business in US territories, they hire a local agent bank. The local agent banks have all the Federal Reserve allowance to conduct banking affairs on native territories. So, they can provide local banking services to foreign banks.
Loan Sanctions and Management: Syndicates seek management services from investment banks in huge transactions and loan sanctions. The investment banks work as a management agents in such syndicated loans.
The investment banks not only assist in managing the loan, but they also help the issuers to securely recover it within due time.
Dealing With Huge Financial Trails: Many business entities require banking facilities to manage their financial trials and transactions. For example, money lending companies or e-Commerce companies have a huge financial trail. These are hard for them to manage. So, they hire third-party banks to settle things accordingly.
How Do Agent Banks Generate Income?
Generally, the agent banks charge their mother banks or their clients for their services. That’s the main income source for agent banks. However, normally the agent banks are just like normal banks. So, they have a conventional income source as well.
Final Thoughts
As you can see, agent banks are helping hands for other banks, personal or business entities who want to expand their financial footprint both on and off the shore. In such cases, agent banks act as a manager or a service provider depending on the needs of the client.
Agent banks are important for the national economy in several regions. For example, they open new doors of opportunities for the foreign banks to conduct business on our home soil. This exploits the financial growth positively. Such institutes are very crucial for the people in the long run.