Bank

Last updated

A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. [1] Lending activities can be directly performed by the bank or indirectly through capital markets. [2]

Contents

Whereas banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized a system known as fractional-reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords.

Banking in its modern sense evolved in the fourteenth century in the prosperous cities of Renaissance Italy but in many ways functioned as a continuation of ideas and concepts of credit and lending that had their roots in the ancient world. In the history of banking, a number of banking dynasties   notably, the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds   have played a central role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena (founded in 1472), while the oldest existing merchant bank is Berenberg Bank (founded in 1590).

History

This 15th-century painting depicts money-dealers at a banca (bench) during the Cleansing of the Temple. Wypedzenie.jpg
This 15th-century painting depicts money-dealers at a banca (bench) during the Cleansing of the Temple.

Banking as an archaic activity (or quasi-banking [3] [4] ) is thought to have begun as early as the end of the 4th millennium BCE, [5] to the 3rd millennia BCE. [6] [7]

Medieval

The present era of banking can be traced to medieval and early Renaissance Italy, to the rich cities in the centre and north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th-century Florence, establishing branches in many other parts of Europe. [8] Giovanni di Bicci de' Medici set up one of the most famous Italian banks, the Medici Bank, in 1397. [9] The Republic of Genoa founded the earliest-known state deposit bank, and Banco di San Giorgio (Bank of St. George), in 1407 at Genoa, Italy. [10]

Early modern

Sealing of the Bank of England Charter (1694), by Lady Jane Lindsay, 1905. Bank of England Charter sealing 1694.jpg
Sealing of the Bank of England Charter (1694), by Lady Jane Lindsay, 1905.

Fractional reserve banking and the issue of banknotes emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London, who possessed private vaults, and who charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only the original depositor could collect the stored goods.

Gradually the goldsmiths began to lend money out on behalf of the depositor, and promissory notes (which evolved into banknotes) were issued for money deposited as a loan to the goldsmith. Thus by the 19th century, we find in ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded [11] and money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. [12] The goldsmith paid interest on deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time-period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument which could circulate as a safe and convenient form of money [13] backed by the goldsmith's promise to pay, [14] [ need quotation to verify ] allowing goldsmiths to advance loans with little risk of default. [15] [ need quotation to verify ] Thus the goldsmiths of London became the forerunners of banking by creating new money based on credit.

Interior of the Helsinki Branch of the Vyborg-Bank [fi] in the 1910s Pohjoismaiden Osakepankin Helsingin sivukonttori.jpg
Interior of the Helsinki Branch of the Vyborg-Bank  [ fi ] in the 1910s

The Bank of England originated the permanent issue of banknotes in 1695. [16] The Royal Bank of Scotland established the first overdraft facility in 1728. [17] By the beginning of the 19th century Lubbock's Bank had established a bankers' clearing house in London to allow multiple banks to clear transactions. The Rothschilds pioneered international finance on a large scale, [18] [19] financing the purchase of shares in the Suez canal for the British government in 1875. [20] [ need quotation to verify ]

Etymology

The word bank was taken into Middle English from Middle French banque, from Old Italian banco, meaning "table", from Old High German banc, bank "bench, counter". Benches were used as makeshift desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths. [21] [22]

Definition

The definition of a bank varies from country to country. See the relevant country pages for more information.

Under English common law, a banker is defined as a person who carries on the business of banking by conducting current accounts for their customers, paying cheques drawn on them and also collecting cheques for their customers. [23]

Banco de Venezuela in Coro. Banco de Venezuela, Coro.JPG
Banco de Venezuela in Coro.
Branch of Nepal Bank in Pokhara, Western Nepal. Bank.Pokhara.JPG
Branch of Nepal Bank in Pokhara, Western Nepal.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is structured or regulated.

The business of banking is in many common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purpose of regulating and supervising banks rather than regulating the actual business of banking. However, in many cases, the statutory definition closely mirrors the common law one. Examples of statutory definitions:

  1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period;
  2. paying or collecting cheques drawn by or paid in by customers. [24]

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques . [25]

Standard business

Large door to an old bank vault. WinonaSavingsBankVault.JPG
Large door to an old bank vault.

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers in the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machines (ATMs).

Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.

Banks issue new money when they make loans. In contemporary banking systems, regulators set a minimum level of reserve funds that banks must hold against the deposit liabilities created by the funding of these loans, in order to ensure that the banks can meet demands for payment of such deposits. These reserves can be acquired through the acceptance of new deposits, sale of other assets, or borrowing from other banks including the central bank. [26]

Range of activities

Activities undertaken by banks include personal banking, corporate banking, investment banking, private banking, transaction banking, insurance, consumer finance, trade finance and other related.

Channels

An American bank in Maryland. SunTrust Bank, Gaithersburg, Maryland, August 25, 2015.jpg
An American bank in Maryland.

Banks offer many different channels to access their banking and other services:

Business models

A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. Traditionally, the most significant method is via charging interest on the capital it lends out to customers. [27] The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.

This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance.

In the past 20 years, American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions.

However, with the convenience of easy credit, there is also an increased risk that consumers will mismanage their financial resources and accumulate excessive debt. Banks make money from card products through interest charges and fees charged to credit and debit card holders, and transaction fees to retailers [28] who accept the bank's cards for payments.

This helps in making a profit and facilitates economic development as a whole. [29]

Recently, as banks have been faced with pressure from fintechs, new and additional business models have been suggested such as freemium, monetisation of data, white-labeling of banking and payment applications, or the cross-selling of complementary products. [30]

Products

A former building society, now a modern retail bank in Leeds, West Yorkshire. Halifax bank, Commercial Street, Leeds (27th May 2010).jpg
A former building society, now a modern retail bank in Leeds, West Yorkshire.
An interior of a branch of National Westminster Bank on Castle Street, Liverpool NatWest Castle Street.jpg
An interior of a branch of National Westminster Bank on Castle Street, Liverpool

Retail

Business (or commercial/investment) banking

Capital and risk

Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Bank capital consists principally of equity, retained earnings and subordinated debt.

Some of the main risks faced by banks include:

The capital requirement is a bank regulation, which sets a framework within which a bank or depository institution must manage its balance sheet. The categorisation of assets and capital is highly standardised so that it can be risk weighted.

After the financial crisis of 2007–2008, regulators force banks to issue Contingent convertible bonds (CoCos). These are hybrid capital securities that absorb losses in accordance with their contractual terms when the capital of the issuing bank falls below a certain level. Then debt is reduced and bank capitalisation gets a boost. Owing to their capacity to absorb losses, CoCos have the potential to satisfy regulatory capital requirement. [33] [34]

Banks in the economy

SEB main building in Tallinn, Estonia SEB Building in Tallinn.jpg
SEB main building in Tallinn, Estonia

Economic functions

The economic functions of banks include:

  1. Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash.
  2. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.
  3. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.
  4. Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long-term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).
  5. Money creation/destruction – whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created and conversely, whenever the principal on that loan is repaid money is destroyed.

Bank crisis

OTP Bank in Presov (Slovakia) Bosakov dom.jpg
OTP Bank in Prešov (Slovakia)

Banks are susceptible to many forms of risk which have triggered occasional systemic crises. [35] These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to the bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans).

Banking crises have developed many times throughout history when one or more risks have emerged for the banking sector as a whole. Prominent examples include the bank run that occurred during the Great Depression, the U.S. Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s.

The 2023 global banking crisis is the latest of these crises: In March 2023, liquidity shortages and bank insolvencies led to three bank failures in the United States, and within two weeks, several of the world's largest banks failed or were shut down by regulators

Size of global banking industry

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008–2009 financial year to a record US$96.4 trillion while profits declined by 85% to US$115 billion. Growth in assets in adverse market conditions was largely a result of recapitalisation. EU banks held the largest share of the total, 56% in 2008–2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment in banking totalled US$66.3 billion in 2009, up 12% on the previous year. [36]

The United States has the most banks in the world in terms of institutions (5,330 as of 2015) and possibly branches (81,607 as of 2015). [37] This is an indicator of the geography and regulatory structure of the US, resulting in a large number of small to medium-sized institutions in its banking system. As of November 2009, China's top four banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branches – more than double the 15,000 branches in the United Kingdom. [36]

Mergers and acquisitions

Between 1985 and 2018 banks engaged in around 28,798 mergers or acquisitions, either as the acquirer or the target company. The overall known value of these deals cumulates to around 5,169 bil. USD. [38] In terms of value, there have been two major waves (1999 and 2007) which both peaked at around 460 bil. USD followed by a steep decline (−82% from 2007 until 2018).

Here is a list of the largest deals in history in terms of value with participation from at least one bank:

Date announcedAcquiring institutionTarget institutionValue of
transaction
($ millions)
NameMid[ clarification needed ]
industry
NationNameMid industryNation
2007-04-25 RFS Holdings BVOther financialsNetherlands ABN-AMRO Holding N.V.BanksNetherlands98,189.19
1998-04-06 Travelers Group IncInsuranceUnited States Citicorp BanksUnited States72,558.18
2014-09-29 UBS AG BanksSwitzerlandUBS AG[ clarification needed ]BanksSwitzerland65,891.51
1998-04-13 NationsBank Corp, Charlotte, North CarolinaBanksUnited States BankAmerica Corp BanksUnited States61,633.40
2004-01-14 JPMorgan Chase & CoBanksUnited States Bank One Corp, Chicago, IllinoisBanksUnited States58,663.15
2003-10-27 Bank of America CorpBanksUnited States FleetBoston Financial Corp, MassachusettsBanksUnited States49,260.63
2008-09-14 Bank of America CorpBanksUnited States Merrill Lynch & Co IncBrokerageUnited States48,766.15
1999-10-13 Sumitomo Bank LtdBanksJapan Sakura Bank LtdBanksJapan45,494.36
2009-02-26 HM Treasury National agencyUnited Kingdom Royal Bank of Scotland Group BanksUnited Kingdom41,878.65
2005-02-18Mitsubishi Tokyo Financial GroupBanksJapan UFJ Holdings IncBanksJapan41,431.03

Regulation

Currently, commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate.

Usually, the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to the customer's order – although money lending, by itself, is generally not included in the definition.

Unlike most other regulated industries, the regulator is typically also a participant in the market, being either publicly or privately governed central bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries, this is not the case. In the UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government's central bank.

Global headquarters of the Bank for International Settlements in Basel Basel - Bottabau am Aeschenplatz1.jpg
Global headquarters of the Bank for International Settlements in Basel

Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer – defined as any entity for which the bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms or create new rights, obligations, or limitations relevant to the bank-customer relationship.

Some types of financial institutions, such as building societies and credit unions, may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules.

The requirements for the issue of a bank license vary between jurisdictions but typically include:

Different types of banking

An illustration of Northern National Bank as advertised in a 1921 book highlighting the opportunities available in Toledo, Ohio Toledo, city of opportunity- a chronicle of the Northwest territory and its conquest and of the gracious city stout hearts and willing hands have built - DPLA - 7eb9ebf857dee23e40e999198de308c4 (page 23) (cropped).jpg
An illustration of Northern National Bank as advertised in a 1921 book highlighting the opportunities available in Toledo, Ohio

Banks' activities can be divided into:

Most banks are profit-making, private enterprises. However, some are owned by the government, or are non-profit organisations.

Types of banks

National Bank of the Republic, Salt Lake City 1908 NatBankRep.jpg
National Bank of the Republic, Salt Lake City 1908
The BANK of Greenland, Nuuk Bank-of-greenland.jpg
The BANK of Greenland, Nuuk
An office of Nordea bank in Mariehamn, Aland Nordea, Mariehamn, 2019 (01).jpg
An office of Nordea bank in Mariehamn, Åland
ATM Al-Rajhi Bank ATM AL RAJHI BANK.JPG
ATM Al-Rajhi Bank
National Copper Bank, Salt Lake City 1911 NatCuBank.jpg
National Copper Bank, Salt Lake City 1911

Types of investment banks

Combination banks

A Banco do Brasil office in Sao Paulo, Brazil, the bank is the largest financial institution in Brazil and Latin America. Avenida Sao Joao, Sao Paulo 2006.jpg
A Banco do Brasil office in São Paulo, Brazil, the bank is the largest financial institution in Brazil and Latin America.

Other types of banks

Challenges within the banking industry

United States

Citibank, The People's Trust Company Building, Brooklyn, New York City. People's Trust Company Building 183 Montague Street Brooklyn.jpg
Citibank, The People's Trust Company Building, Brooklyn, New York City.

The United States banking industry is one of the most heavily regulated and guarded in the world, [41] with multiple specialised and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks. State non-member banks are examined by the state agencies as well as the FDIC. [42] :236 National banks have one primary regulator – the OCC.

Each regulatory agency has its own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal inter-agency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing.

In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS, and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining regulators face an increased burden with an increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States.

The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders.

The management of the banks' asset portfolios also remains a challenge in today's economic environment. Loans are a bank's primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality has become a big problem for financial institutions.

Safra National Bank, New York Mirror building (4004925857).jpg
Safra National Bank, New York

There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of "good times." The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are discovered. In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs.

Banks also face a host of other challenges such as ageing ownership groups. Across the country, many banks' management teams and boards of directors are ageing. Banks also face ongoing pressure from shareholders, both public and private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, cheque cashing services, credit card companies, etc.

As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and have become big players in such activities.

Another major challenge is the ageing infrastructure, also called legacy IT. Backend systems were built decades ago and are incompatible with new applications. Fixing bugs and creating interfaces costs huge sums, as knowledgeable programmers become scarce. [43]

Loan activities of banks

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits. [44]

To compete for deposits, US savings institutions offer many different types of plans: [44]

Types of accounts

Suburban bank branch BBTLexington.jpg
Suburban bank branch

Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. The bank credits a credit account to increase its balance, and debits a credit account to decrease its balance. [45]

The customer debits his or her savings/bank (asset) account in his ledger when making a deposit (and the account is normally in debit), while the customer credits a credit card (liability) account in his ledger every time he spends money (and the account is normally in credit). When the customer reads his bank statement, the statement will show a credit to the account for deposits, and debits for withdrawals of funds. The customer with a positive balance will see this balance reflected as a credit balance on the bank statement. If the customer is overdrawn, he will have a negative balance, reflected as a debit balance on the bank statement.

Brokered deposits

One source of deposits for banks is deposit brokers who deposit large sums of money on behalf of investors through trust corporations. This money will generally go to the banks which offer the most favourable terms, often better than those offered local depositors. It is possible for a bank to engage in business with no local deposits at all, all funds being brokered deposits. Accepting a significant quantity of such deposits, or "hot money" as it is sometimes called, puts a bank in a difficult and sometimes risky position, as the funds must be lent or invested in a way that yields a return sufficient to pay the high interest being paid on the brokered deposits. This may result in risky decisions and even in eventual failure of the bank. Banks which failed during 2008 and 2009 in the United States during the global financial crisis had, on average, four times more brokered deposits as a percent of their deposits than the average bank. Such deposits, combined with risky real estate investments, factored into the savings and loan crisis of the 1980s. Regulation of brokered deposits is opposed by banks on the grounds that the practice can be a source of external funding to growing communities with insufficient local deposits. [46] There are different types of accounts: saving, recurring and current accounts.

Custodial accounts

Custodial accounts are accounts in which assets are held for a third party. For example, businesses that accept custody of funds for clients prior to their conversion, return, or transfer may have a custodial account at a bank for these purposes.

Globalisation in the banking industry

In modern times there have been huge reductions to the barriers of global competition in the banking industry. Increases in telecommunications and other financial technologies, such as Bloomberg, have allowed banks to extend their reach all over the world since they no longer have to be near customers to manage both their finances and their risk. The growth in cross-border activities has also increased the demand for banks that can provide various services across borders to different nationalities. Despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalised as some other industries. In the US, for instance, very few banks even worry about the Riegle–Neal Act, which promotes more efficient interstate banking. In the vast majority of nations around the globe, the market share for foreign owned banks is currently less than a tenth of all market shares for banks in a particular nation. One reason the banking industry has not been fully globalised is that it is more convenient to have local banks provide loans to small businesses and individuals. On the other hand, for large corporations, it is not as important in what nation the bank is in since the corporation's financial information is available around the globe. [47]

See also

Related Research Articles

<span class="mw-page-title-main">Commercial bank</span> Financial institution

A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.

The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.

<span class="mw-page-title-main">Bank account</span> Financial account maintained by a bank

A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type of account it offers, which are classified in commonly understood types, such as deposit accounts, credit card accounts, current accounts, loan accounts or many other types of account. A customer may have more than one account. Once an account is opened, funds entrusted by the customer to the financial institution on deposit are recorded in the account designated by the customer. Funds can be withdrawn from loan loaders.

Credit risk is the possibility of losing a lender holds due to a risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs. Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants.

<span class="mw-page-title-main">Fractional-reserve banking</span> System of banking

Fractional-reserve banking is the system of banking in all countries worldwide, under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers. Bank reserves are held as cash in the bank or as balances in the bank's account at the central bank. Fractional-reserve banking differs from the hypothetical alternative model, full-reserve banking, in which banks would keep all depositor funds on hand as reserves.

<span class="mw-page-title-main">Full-reserve banking</span> Offering of loans exclusively from time deposits

Full-reserve banking is a system of banking where banks do not lend demand deposits and instead only lend from time deposits. It differs from fractional-reserve banking, in which banks may lend funds on deposit, while fully reserved banks would be required to keep the full amount of each customer's demand deposits in cash, available for immediate withdrawal.

<span class="mw-page-title-main">Financial services</span> Economic service provided by the finance industry

Financial services are economic services tied to finance provided by financial institutions. Financial services encompass a broad range of service sector activities, especially as concerns financial management and consumer finance.

<span class="mw-page-title-main">Transaction account</span> Bank holding that clients can access on demand

A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account or bank account held at a bank or other financial institution. It is available to the account owner "on demand" and is available for frequent and immediate access by the account owner or to others as the account owner may direct. Access may be in a variety of ways, such as cash withdrawals, use of debit cards, cheques and electronic transfer. In economic terms, the funds held in a transaction account are regarded as liquid funds. In accounting terms, they are considered as cash.

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence.

<span class="mw-page-title-main">Savings and loan association</span> Type of financial institution

A savings and loan association (S&L), or thrift institution, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. The terms "S&L" and "thrift" are mainly used in the United States; similar institutions in the United Kingdom, Ireland and some Commonwealth countries include building societies and trustee savings banks. They are often mutually held, meaning that the depositors and borrowers are members with voting rights, and have the ability to direct the financial and managerial goals of the organization like the members of a credit union or the policyholders of a mutual insurance company. While it is possible for an S&L to be a joint-stock company, and even publicly traded, in such instances it is no longer truly a mutual association, and depositors and borrowers no longer have membership rights and managerial control. By law, thrifts can have no more than 20 percent of their lending in commercial loans—their focus on mortgage and consumer loans makes them particularly vulnerable to housing downturns such as the deep one the U.S. experienced in 2007.

<span class="mw-page-title-main">Savings and loan crisis</span> US financial crisis from 1986 to 1995

The savings and loan crisis of the 1980s and 1990s was the failure of 32% of savings and loan associations (S&Ls) in the United States from 1986 to 1995. An S&L or "thrift" is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members.

Banking in Australia is dominated by four major banks: Commonwealth Bank, Westpac, Australia & New Zealand Banking Group and National Australia Bank. There are several smaller banks with a presence throughout the country which includes Bendigo and Adelaide Bank, Suncorp Bank, and a large number of other financial institutions, such as credit unions, building societies and mutual banks, which provide limited banking-type services and are described as authorised deposit-taking institutions (ADIs). Many large foreign banks have a presence, but few have a retail banking presence. The central bank is the Reserve Bank of Australia (RBA). The Australian government’s Financial Claims Scheme (FCS) guarantees deposits up to $250,000 per account-holder per ADI in the event of the ADI failing.

<span class="mw-page-title-main">Overdraft</span> Payments from a bank account exceeding the balance

An overdraft occurs when something is withdrawn in excess of what is in a current account. For financial systems, this can be funds in a bank account. In these situations the account is said to be "overdrawn". In the economic system, if there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

<span class="mw-page-title-main">Retail banking</span> Offering of services by a financial institution to the general public

Retail banking, also known as consumer banking or personal banking, is the provision of services by a bank to the general public, rather than to companies, corporations or other banks, which are often described as wholesale banking.

The Bank of St Helena is a government-owned bank based in the British Overseas Territory of Saint Helena, Ascension and Tristan da Cunha. It operates branches on St Helena and Ascension Island. The Government of St. Helena owns 100% of the bank and operates it as a parastatal. The governor appoints the board of directors. The bank holds deposits of around SHP 73.2 million. On the asset side, lending accounts for SHP 16.5 million, and SHP 56.5 million is invested.

China's banking sector had CN¥319.7 trillion in assets at the end of 2020. The "Big Four" state-owned commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China, all of which are among the largest banks in the world As of 2018. Other notable big and also the largest banks in the world are China Merchants Bank and Ping An Bank.

A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a financial institution that is not legally a bank; it does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFC facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include hedge funds, insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations. Alan Greenspan has identified the role of NBFIs in strengthening an economy, as they provide "multiple alternatives to transform an economy's savings into capital investment which act as backup facilities should the primary form of intermediation fail."

Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Apart from the bank regulatory agencies the U.S. maintains separate securities, commodities, and insurance regulatory agencies at the federal and state level, unlike Japan and the United Kingdom. Bank examiners are generally employed to supervise banks and to ensure compliance with regulations.

<span class="mw-page-title-main">Deposit account</span> Bank holding into and from which money can be placed or withdrawn

A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below.

<i>United Dominions Trust Ltd v Kirkwood</i>

United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431 was a decision of the Court of Appeal relating to what constitutes "banking business" as a matter of English law.

References

  1. Compare: "Bank of England". Rulebook Glossary. 1 January 2014. Retrieved 20 July 2020. bank means:
    (1) a firm with a Part 4A Permission to carry on the regulated activity of accepting deposits and is a credit institution, but is not a credit union, friendly society or a building society; or
    (2) an EEA bank.
  2. Choudhry, Moorad (2012). The Principles of Banking . Wiley. p. 3. ISBN   978-1119755647.
  3. M. Chahin – The Kingdom of Armenia: A History Routledge, 2001 ISBN   0700714529
  4. ME Stevens Temples, Tithes, and Taxes: The Temple and the Economic Life of Ancient Israel Baker Academic, 2006 ISBN   0801047773
  5. N Luhmann – Risk: A Sociological Theory Transaction Publishers, 2005 ISBN   0202307646 (p. 181)
  6. Davies, R; Davies, G. A History of Money from Ancient Times to the Present Day. Cardiff: University of Wales Press, 1996.
  7. naissance de la banque universalis.fr Accessed 15 September 2018
  8. Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company.
  9. Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum
  10. Macesich, George (30 June 2000). "Central Banking: The Early Years: Other Early Banks". Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group). p. 42. ISBN   978-0-275-96777-2 . Retrieved 12 March 2009. The first state deposit bank was the Bank of St. George in Genoa, which was established in 1407.
  11. Compare: Story, Joseph (1832). "On Deposits". In Schouler, James (ed.). Commentaries on the Law of Bailments: With Illustrations from the Civil and the Foreign Law (9 ed.). Boston: Little, Brown, and Company (published 1878). p. 87. Retrieved 20 August 2020. In the ordinary cases of deposits of money with banking corporations, or bankers, the transaction amounts to a mere loan or mutuum, or irregular deposit, and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded.
  12. Lord Chancellor Cottenham, Foley v Hill (1848) 2 HLC 28.
  13. Richards, Richard D. (1929). "The Goldsmith bankers and the evolution of English paper money". The Early History of Banking in England. Routledge Library Editions: Banking and Finance. Vol. 30 (reprint ed.). London: Routledge (published 2012). p. 40. ISBN   9780203116067 . Retrieved 20 August 2020. [...] the promissory note originated as a receipt given by the goldsmith for money, which he took charge of for a customer but was not allowed to use. Such a note was relly a warehouse voucher which could not be assigned. When, however, it became a receipt for a money deposit, which the goldsmith was allowed to use for the purpose of making advances to his customers, it developed into an assignable instrument. Ultimately such notes were issued by the goldsmiths in the form of loans and were not necessarily backed by coin and bullion.
  14. Richards. The usual denomination was 50 or 100 pounds, so these notes were not an everyday currency for the common people.
  15. Richards, p. 40
  16. "A History of British Banknotes". britishnotes.co.uk.
  17. "A short history of overdrafts". eccount money. Archived from the original on 5 November 2013.
  18. "The History of Banks | How They've Changed through the Years". worldbank.org.ro. Retrieved 6 May 2020. International financing in the 19th Century took hold due to the Rothschilds.
  19. "History of banking". History World. Retrieved 20 August 2020. The Danish loan [1803] is the first of many such transactions on behalf of governments which rapidly establish the Rothschild family as Europe's most powerful bankers, rising to a pre-eminence comparable to that of the Medici and the Fugger in earlier centuries.
    The family is soon represented in all the important centres of the continent.
  20. "A History of Banking". www.localhistories.org. Retrieved 6 May 2020.
  21. de Albuquerque, Martim (1855). Notes and Queries. in: George Bell. p.  431.
  22. "bank". Online Etymology Dictionary. Archived from the original on 11 October 2023.
  23. United Dominions Trust Ltd v Kirkwood, 1966, English Court of Appeal, 2 QB 431
  24. (Banking Ordinance, Section 2, Interpretation, Hong Kong) In this case the definition is extended to include accepting any deposits repayable in less than 3 months, companies that accept deposits of greater than HK$100 000 for periods of greater than 3 months are regulated as deposit taking companies rather than as banks in Hong Kong.
  25. e.g. Tyree's Banking Law in New Zealand, A L Tyree, LexisNexis 2003, p. 70.
  26. McLeay, Michael; Radia, Amar; Thomas, Ryland (8 March 2014). "Money creation in the modern economy". Bank of England Quarterly Bulletin. Retrieved 9 July 2022.
  27. "How Do Banks Make Money?". GOBankingRates. 27 October 2017.
  28. "Banking Channels | Bankedge". BANKEDGE | Professional Certification Courses In Banking. 8 February 2016. Retrieved 5 July 2020.
  29. "How Banks Make Money". The Street. 24 October 2007. Retrieved 8 September 2011.
  30. Pejic, Igor (28 March 2019). Blockchain Babel: The Crypto-craze and the Challenge to Business (1st ed.). Kogan Page. ISBN   9780749484163.
  31. Basel Committee on Banking Supervision (30 November 1999). "Principles for the Management of Credit Risk" (PDF). Bank for International Settlements . p. 1. Retrieved 28 January 2016. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms.
  32. Bolt, Wilko; Haan, Leo de; Hoeberichts, Marco; Oordt, Maarten van; Swank, Job (September 2012). "Bank Profitability during Recessions" (PDF). Journal of Banking & Finance . 36 (9): 2552–64. doi:10.1016/j.jbankfin.2012.05.011. Archived from the original (PDF) on 3 October 2020. Retrieved 13 December 2019.
  33. Raviv, Alon (13 August 2014). "Bank Stability and Market Discipline: Debt-for-Equity Swap versus Subordinated Notes" (PDF). EconPapers . The Hebrew University Business School. p. 59. Archived from the original (PDF) on 13 July 2018. Retrieved 13 July 2018.
  34. Flannery, Mark J. (November 2002). "No Pain, No Gain? Effecting Market Discipline via "Reverse Convertible Debentures"" (PDF). University of Florida. p. 31. Retrieved 13 July 2018.
  35. Rustici, Chiara. "Personal Data And The Next Subprime Crisis". Forbes.
  36. 1 2 "Banking 2010" (PDF). TheCityUK . pp. 3–4. Archived from the original (PDF) on 15 June 2012. Retrieved 20 June 2011.(638 KB) charts 7–8
  37. "FDIC: HSOB Commercial Banks". www5.fdic.gov. Archived from the original on 26 March 2010. Retrieved 4 September 2016.
  38. "M&A by Industries - Institute for Mergers, Acquisitions and Alliances (IMAA)". Institute for Mergers, Acquisitions and Alliances (IMAA). Retrieved 28 February 2018.
  39. TNAU. "Land Development Bank". TNAU Agritech Portal. Retrieved 8 January 2014.
  40. "List of Commercial Banks in Nepal" . Retrieved 6 June 2019.
  41. Scott Besley and Eugene F. Brigham, Principles of Finance, 4th ed. (Mason, OH: South-Western Cengage Learning, 2009), 125. This popular university textbook explains: "Generally speaking, U.S. financial institutions have been much more heavily regulated and faced greater limitations ... than have their foreign counterparts."
  42. Van Loo, Rory (1 February 2018). "Making Innovation More Competitive: The Case of Fintech". UCLA Law Review. 65 (1): 232.
  43. Irrera, Anna. "Banks scramble to fix old systems as IT 'cowboys' ride into sunset". U.S. Retrieved 2 November 2018.
  44. 1 2 Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood: Irwin. pp. 128–29. ISBN   978-0-256-13948-8.
  45. Statistics Department (2001). "Source Data for Monetary and Financial Statistics". Monetary and Financial Statistics: Compilation Guide. Washington D.C.: International Monetary Fund. p. 24. ISBN   978-1-58906-584-0 . Retrieved 14 March 2009.
  46. Lipton, Eric; Martin, Andrew (3 July 2009). "For Banks, Wads of Cash and Loads of Trouble". The New York Times . Macon, Ga. Retrieved 13 July 2018.
  47. Berger, Allen N; Dai, Qinglei; Ongena, Steven; Smith, David C (1 March 2003). "To what extent will the banking industry be globalized? A study of bank nationality and reach in 20 European nations". Journal of Banking & Finance . 27 (3): 383–415. doi:10.1016/S0378-4266(02)00386-2 . Retrieved 28 January 2016 via Google Scholar.

Further reading