Bank


A bank is a financial institution that accepts deposits from the public and creates a demand deposit, while simultaneously making loans. Lending activities can be performed either directly or indirectly through capital markets.
Due to the importance of banks in the financial stability 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, while the oldest existing merchant bank is Berenberg Bank.

History

The concept of banking may have begun in ancient Assyria and Babylonia, with the merchants offering loans of grain as collateral within a barter system. Lenders in ancient Greece and during the Roman Empire added two important innovations: they accepted deposits and changed money. Archaeology from this period in ancient China and India also shows evidence of money lending.
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. One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de' Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio, was founded in 1407 at Genoa, Italy.
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 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 the money out on behalf of the depositor, and promissory notes were issued for money deposited as a loan to the goldsmith. The goldsmith paid interest on these deposits. Since the promissory notes were payable on demand, and the advances 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 backed by the goldsmith's promise to pay, allowing goldsmiths to advance loans with little risk of default. Thus, the goldsmiths of London became the forerunners of banking by creating new money based on credit.
The Bank of England was the first to begin the permanent issue of banknotes, in 1695. The Royal Bank of Scotland established the first overdraft facility in 1728. By the beginning of the 19th century a bankers' clearing house was established in London to allow multiple banks to clear transactions. The Rothschilds pioneered international finance on a large scale, financing the purchase of the Suez canal for the British government.

Etymology

The word bank was taken Middle English from Middle French banque, from Spanish banca,from Old Italian banca, 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.

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 his customers, paying cheques drawn on him/her and also collecting cheques for his/her customers.
in Coro.
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'. 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 ... 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.
Since the advent of EFTPOS, 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.

Standard business

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, Wire transfers or telegraphic transfer, EFTPOS, and automated teller machines.
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 can create new money when they make a loan. New loans throughout the banking system generate new deposits elsewhere in the system. The money supply is usually increased by the act of lending, and reduced when loans are repaid faster than new ones are generated. In the United Kingdom between 1997 and 2007, there was an increase in the money supply, largely caused by much more bank lending, which served to push up property prices and increase private debt. The amount of money in the economy as measured by M4 in the UK went from £750 billion to £1700 billion between 1997 and 2007, much of the increase caused by bank lending. If all the banks increase their lending together, then they can expect new deposits to return to them and the amount of money in the economy will increase. Excessive or risky lending can cause borrowers to default, the banks then become more cautious, so there is less lending and therefore less money so that the economy can go from boom to bust as happened in the UK and many other Western economies after 2007.

Range of activities

Activities undertaken by banks include personal banking, corporate banking, investment banking, private banking, transaction banking, insurance, consumer finance, foreign exchange trading, commodity trading, trading in equities, futures and options trading and money market trading.

Channels

Banks offer many different channels to access their banking and other services:
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. 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.
This helps in making a profit and facilitates economic development as a whole.
Recently, as banks have been faced with pressure from fintechs, new and additional business models have been suggested such as freemium, monetization of data, white-labeling of banking and payment applications, or the cross-selling of complementary products.

Products

Retail

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.
After the 2007-2009 financial crisis, regulators force banks to issue Contingent convertible bonds.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 capitalization gets a boost. Owing to their capacity to absorb losses, CoCos have the potential to satisfy regulatory capital requirement.
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 categorization of assets and capital is highly standardized so that it can be risk weighted.

Banks in the economy

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 economize 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 intermediation – banks borrow and lend back-to-back on their own account as middle men.
  4. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers, 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.
  5. 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 and redemptions, 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.
  6. 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

Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk, credit risk, and interest rate risk.
Banking crises have developed many times throughout history when one or more risks have emerged for a 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.

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 recapitalization. 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 banking totalled US$66.3 billion in 2009, up 12% on the previous year.
The United States has the most banks in the world in terms of institutions and possibly branches. 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 4 banks have in excess of 67,000 branches 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 UK.

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. In terms of value, there have been two major waves which both peaked at around 460 bil. USD followed by a steep decline.
Here is a list of the largest deals in history in terms of value with participation from at least one bank:
Date announcedAcquiror nameAcquiror mid industryAcquiror nationTarget nameTarget mid industryTarget nationValue of transaction
2007-04-25RFS Holdings BVOther financialsNetherlandsABN-AMRO Holding N.V.BanksNetherlands98,189.19
1998-04-06Travelers Group IncInsuranceUnited StatesCiticorpBanksUnited States72,558.18
2014-09-29UBS AGBanksSwitzerlandUBS AGBanksSwitzerland65,891.51
1998-04-13NationsBank Corp, Charlotte, North CarolinaBanksUnited StatesBankAmerica CorpBanksUnited States61,633.40
2004-01-14JPMorgan Chase & CoBanksUnited StatesBank One Corp, Chicago, IllinoisBanksUnited States58,663.15
2003-10-27Bank of America CorpBanksUnited StatesFleetBoston Financial Corp, MassachusettsBanksUnited States49,260.63
2008-09-14Bank of America CorpBanksUnited StatesMerrill Lynch & Co IncBrokerageUnited States48,766.15
1999-10-13Sumitomo Bank LtdBanksJapanSakura Bank LtdBanksJapan45,494.36
2009-02-26HM TreasuryNational agencyUnited KingdomRoyal Bank of Scotland GroupBanksUnited Kingdom41,878.65
2005-02-18Mitsubishi Tokyo Financial GroupBanksJapanUFJ 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 a 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 issue their own banknotes in addition to those issued by the Bank of England, the UK government's central bank.
in Basel
Banking law is based on a contractual analysis of the relationship between the bank 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 and/or create new rights, obligations or limitations relevant to the bank-customer relationship.
Some types of financial institution, 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:
Banks' activities can be divided into:
Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organizations.

Types of bank

United States

The United States banking industry is one of the most heavily regulated and guarded in the world, with multiple specialized and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation as a regulator. However, for soundness examinations, the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency is the primary federal regulator for national banks. State non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulator – the OCC.
Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere.
The Federal Financial Institutions Examination Council 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 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.
, 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 board of directors are ageing. Banks also face ongoing pressure by 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 to new applications. Fixing bugs and creating interfaces costs huge sums, as knowledgeable programmers become scarce.

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.
To compete for deposits, US savings institutions offer many different types of plans:
s 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.
The customer debits his or her savings/bank account in his ledger when making a deposit, while the customer credits a credit card account in his ledger every time he spends money. 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 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. 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 this purposes.

Globalization in the banking industry

In modern time there has 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.
However, despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalized 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 globalized is that it is more convenient to have local banks provide loans to small business 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.