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.
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.