What is chain banking?

Chain banking is a situation where a small group of people control three or more independent banks. The mechanisms used to establish this type of agreement typically involve securing sufficient shares between individuals to retain controlling interest in each of the banking corporations involved. The business can also be managed with the establishment of interlinked boards of directors that effectively create a network between the banks without the need for some sort of central holding company.

The concept of chain banking is different from group banking in that the entities involved in the chain banking arrangement remain autonomous and are not owned by a single holding company. In contrast, the group banking model requires a holding company to own all the banks involved, effectively creating an umbrella under which all 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.

In previous years, chain banking offered several benefits to investors. The strategy allowed consistent returns from several banks operating in the same community, without fear of strong competition from other banks in the area. The network approach made it possible for investors to use their cumulative influence to keep banking services and corresponding fees from one company to another, thus ensuring that returns remained consistent. The network banking process also allowed investors to create a network in which each bank in the network served a different part of the market within the area. For example, one bank may focus on business accounts while another specializes in personal accounts, and the third bank in the chain provides services related to the purchase and sale of securities.

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