HOME

TheInfoList




A bank is a
financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entit ...
that accepts
deposits 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, Transaction account#Current accounts, current accounts or any of several other ...
from the public and creates a
demand deposit Demand deposits or non-confidential money are funds held in demand account 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 ...
while simultaneously making loans.
Lending In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that debt ...
activities can be directly performed by the bank or indirectly through
capital market 200px, The trading floor of the New York Stock Exchange, one of the largest secondary capital markets in the world. Most of the trades on the New York Stock Exchange are executed electronically, but its hybrid structure allows some trading to be ...
s. Because 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 Fractional-reserve banking is the system of banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peo ...
, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business Business is the activity of making one's living or making money by producing or buying and selling ...
, banks are generally subject to
minimum capital requirement {{multiple issues, {{essay-like, date=October 2013 {{original research, date=October 2013 {{unreferenced, date=October 2013 {{notability, date=October 2013 Academics, practitioners, and regulator (economics), regulators all recognise and agree tha ...
s based on an international set of capital standards, the
Basel Accords The Basel Accords refer to the banking supervision Accords (recommendations on banking regulations)—Basel I Basel I is the round of deliberations by central bankers A central bank, reserve bank, or monetary authority is an institution tha ...
. Banking in its modern sense evolved in the fourteenth century in the prosperous cities of
Renaissance Italy The Italian Renaissance ( it, Rinascimento ) was a period in Italian history The history of Italy covers the Ancient Period, the Middle Ages and the modern era. Since classical times, ancient Phoenicians, Magna Graecia, Greeks, Etruscan civil ...
but in many ways functioned as a continuation of ideas and concepts of
credit px, Domestic credit to private sector in 2005 Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, k ...
and
lending In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that debt ...
that had their roots in the
ancient world Ancient history is the aggregate of past eventsWordNet Search – 3.0
"History"
from t ...

ancient world
. In the
history of banking The history of banking began with the first prototype banks which were the merchants of the world, who gave grain loans to farmers and traders who carried goods between cities. This was around 2000 BC in Assyria, India and Sumeria. Later, in ancie ...
, a number of banking dynasties — notably, the Medicis, the
Fugger Fugger () is a German upper bourgeois Bourgeoisie (; ) is a polysemous Polysemy ( or ; from grc-gre, πολύ-, , "many" and , , "sign") is the capacity for a word or phrase to have multiple meanings, usually related by contiguity of me ...
s, the
Welser Welser was a German German(s) may refer to: Common uses * of or related to Germany * Germans, Germanic ethnic group, citizens of Germany or people of German ancestry * For citizens of Germany, see also German nationality law * German langu ...
s, the Berenbergs, and the Rothschilds — have played a central role over many centuries. The oldest existing
retail bank Retail banking, also known as consumer banking or personal banking, is the provision of services by a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultane ...
is Banca Monte dei Paschi di Siena (founded in 1472), while the oldest existing
merchant bank A merchant bank is historically a bank dealing in commercial loans and investment. In modern British usage it is the same as an investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Inv ...
is
Berenberg Bank The Berenberg family (Dutch Dutch commonly refers to: * Something of, from, or related to the Netherlands * Dutch people () * Dutch language () *Dutch language , spoken in Belgium (also referred as ''flemish'') Dutch may also refer to:" Cast ...
(founded in 1590).


History

The concept of banking may have begun in ancient
Assyria Assyria (), also called the Assyrian Empire, was a n kingdom and of the that existed as a state from perhaps as early as the 25th century BCE (in the form of the city-state) until its collapse between 612 BCE and 609 BCE; thereby spanning ...

Assyria
and
Babylonia Babylonia () was an and based in central-southern which was part of Ancient Persia (present-day and ). A small -ruled state emerged in 1894 BCE, which contained the minor administrative town of . It was merely a small provincial town dur ...
with
merchant A merchant is a person who trades in commodities In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distributi ...

merchant
s offering loans of grain as collateral within a
barter In trade, barter (derived from ''baretor'') is a system of exchange (economics), exchange in which participants in a financial transaction, transaction directly exchange good (economics), goods or service (economics), services for other goods or ...

barter
system. Lenders in
ancient Greece Ancient Greece ( el, Ἑλλάς, Hellás) was a civilization belonging to a period of History of Greece, Greek history from the Greek Dark Ages of the 12th–9th centuries BC to the end of Classical Antiquity, antiquity ( AD 600). This era wa ...
and during the
Roman Empire The Roman Empire ( la, Imperium Rōmānum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post-Republican Republican can refer to: Political ideology * An advocate of a republic, a type of governme ...

Roman Empire
added two important innovations: they accepted
deposits 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, Transaction account#Current accounts, current accounts or any of several other ...
and changed money. Archaeology from this period in
ancient China The earliest known written records of the history of China date from as early as 1250 BC, from the Shang dynasty (c. 1600–1046 BC), during the king Wu Ding's reign, who was mentioned as the twenty-first Shang king by the same. Ancient hi ...
and
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and dependencies by population, second-most populous ...
also shows evidence of
money lending In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avail ...
. The present era of banking can be traced to medieval and early
Renaissance The Renaissance ( , ) , from , with the same meanings. is a period Period may refer to: Common uses * Era, a length or span of time * Full stop (or period), a punctuation mark Arts, entertainment, and media * Period (music), a concept in ...

Renaissance
Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of Italian Peninsula, a peninsula delimited by the Alps and List of islands of Italy, several islands surrounding it, whose ...

Italy
, to the rich cities in the centre and north like
Florence Florence ( ; it, Firenze ) is a city in Central-Northern Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of Italian Peninsula, a peninsula delimited by the Al ...

Florence
,
Lucca Lucca ( , ) is a city and ''comune The (; plural: ) is a of , roughly equivalent to a or . Importance and function The provides essential public services: of births and deaths, , and maintenance of local roads and public works. ...

Lucca
,
Siena Siena ( , ; in English sometimes spelled Sienna; lat, Sena Iulia) is a city A city is a large .Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Penguin.Kuper, A. and Kuper, J., eds (1996) ''The Social Science En ...

Siena
,
Venice Venice ( ; it, Venezia ; vec, Venesia or ) is a city in northeastern Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of delimited by the and surrounding ...

Venice
and
Genoa Genoa ( ; it, Genova ; locally ; lij, Zêna ; English, historically, and la, Genua) is the capital of the Regions of Italy, Italian region of Liguria and the List of cities in Italy, sixth-largest city in Italy. In 2015, 594,733 people lived ...

Genoa
. The Bardi and
Peruzzi The Peruzzi were bankers of Florence Florence ( ; it, Firenze ) is a city in Central Italy and the capital city of the Tuscany Regions of Italy, region. It is the most populated city in Tuscany, with 383,084 inhabitants in 2013, and over 1, ...
families dominated banking in 14th-century Florence, establishing branches in many other parts of
Europe Europe is a continent A continent is any of several large landmasses. Generally identified by convention (norm), convention rather than any strict criteria, up to seven geographical regions are commonly regarded as continents. Ordered ...

Europe
.
Giovanni di Bicci de' Medici Giovanni di Bicci de' Medici (c. 1360 – February 1429) was an Italian banker and founder of the Medici Bank. While other members of the Medici family, such as Chiarissimo di Giambuono de' Medici, who served in the Signoria of Florence in 1 ...

Giovanni di Bicci de' Medici
set up one of the most famous Italian banks, the
Medici Bank#REDIRECT Medici Bank The Medici Bank (Italian: ''Banco dei Medici'' ) was a financial institution created by the Medici family in Italy during the 15th century (1397–1494). It was the largest and most respected bank in Europe during its prime. T ...
, in 1397. The
Republic of Genoa The Republic of Genoa ( lij, Repúbrica de Zêna ; it, Repubblica di Genova; la, Res Publica Ianuensis) was a medieval and early modern maritime republic The maritime republics ( it, repubbliche marinare), also called merchant republics ( it ...
founded the earliest-known state deposit bank, Banco di San Giorgio (Bank of St. George), in 1407 at
Genoa Genoa ( ; it, Genova ; locally ; lij, Zêna ; English, historically, and la, Genua) is the capital of the Regions of Italy, Italian region of Liguria and the List of cities in Italy, sixth-largest city in Italy. In 2015, 594,733 people lived ...

Genoa
,
Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of Italian Peninsula, a peninsula delimited by the Alps and List of islands of Italy, several islands surrounding it, whose ...

Italy
.
Fractional reserve banking Fractional-reserve banking is the system of banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peo ...
and the issue of
banknote A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
s emerged in the 17th and 18th centuries. Merchants started to store their gold with the
goldsmith A goldsmith is a metalworker Metalworking is the process of shaping and reshaping metals to create useful objects, parts, assemblies, and large scale structures. As a term it covers a wide and diverse range of processes, skills, and tools for ...

goldsmith
s of
London London is the Capital city, capital and List of urban areas in the United Kingdom, largest city of England and the United Kingdom. It stands on the River Thames in south-east England at the head of a estuary down to the North Sea, and has b ...

London
, who possessed private vaults, and who charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued
receipt A receipt (also known as a packing list, packing slip, packaging slip, (delivery) docket, shipping list, delivery list, bill of parcel, Manifest (transportation), manifest or customer receipt) is a document acknowledging that a person has rece ...

receipt
s certifying the quantity and purity of the metal they held as a
bailee Bailment is a legal relationship in , where the owner transfers physical of ("chattel") for a time, but retains ownership. The owner giving up custody is the "bailor" and person who takes is "bailee". The bailee holds the personal property in ...
; 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 note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of ...
s (which evolved into banknotes) were issued for money deposited as a loan to the goldsmith. Thus by the 19th century we find " 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". and " ney, 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." 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 Fractional-reserve banking is the system of banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peo ...
. 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 Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It ...
. Thus the goldsmiths of London became the forerunners of banking by creating new money based on credit. The
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker, and still one of the bankers for t ...

Bank of England
originated the permanent issue of
banknote A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
s in 1695. The
Royal Bank of Scotland The Royal Bank of Scotland ( gd, Banca Rìoghail na h-Alba, commonly abbreviated as RBS) is a major retail banking, retail and commercial bank in Scotland. It is one of the retail banking subsidiaries of NatWest Group, together with NatWest (in ...
established the first
overdraft An overdraft occurs when money is withdrawn in excess of what is on the current account. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn i ...
facility in 1728. By the beginning of the 19th century Lubbock's Bank had established a
bankers' clearing house Cheque clearing (or check clearing in American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to ...
in London to allow multiple banks to clear transactions. The Rothschilds pioneered
international finance International finance (also referred to as international monetary economics or international macroeconomics) is the branch of financial economics Financial economics is the branch of economics Economics () is a social science So ...
on a large scale, financing the purchase of shares in the
Suez canal The Suez Canal ( ar, قَنَاةُ ٱلسُّوَيْسِ, ') is an artificial sea-level Mean sea level (MSL) (often shortened to sea level) is an mean, average level of the surface of one or more of Earth's bodies of water from which hei ...
for the British government in 1875.


Etymology

The word'' bank'' was taken into
Middle English Middle English (abbreviated to ME) was a form of the English language English is a West Germanic language of the Indo-European language family The Indo-European languages are a language family A language is a structured sys ...
from
Middle French Middle French (french: moyen français) is a historical division of the French language French ( or ) is a Romance language The Romance languages, less commonly Latin or Neo-Latin languages, are the modern languages that evolved from ...
''banque'', from Old
Italian Italian may refer to: * Anything of, from, or related to the country and nation of Italy ** Italians, an ethnic group or simply a citizen of the Italian Republic ** Italian language, a Romance language *** Regional Italian, regional variants of the ...

Italian
''banca'', meaning "table", from
Old High German Old High German (OHG, german: Althochdeutsch, German abbr. ) is the earliest stage of the German language German ( Standard High German: , ) is a West Germanic language mainly spoken in Central Europe Central Europe is an area of Euro ...
''banc, bank'' "bench, counter". Benches were used as makeshift desks or exchange counters during the
Renaissance The Renaissance ( , ) , from , with the same meanings. is a period Period may refer to: Common uses * Era, a length or span of time * Full stop (or period), a punctuation mark Arts, entertainment, and media * Period (music), a concept in ...

Renaissance
by
Florentine Florentine most commonly refers to: * a person or thing from Florence, a city in Italy * the Florentine dialect Florentine may also refer to: Places * Florentin, Tel Aviv, a neighborhood in the southern part of Tel Aviv, Israel * Leone, Floren ...

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 English law is the common law In law, common law (also known as judicial precedent or judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions. ''Black' ...
, a banker is defined as a person who carries on the business of banking by conducting
current accounts Currents or The Current may refer to: Science and technology * Current (fluid) A current in a fluid In physics, a fluid is a substance that continually Deformation (mechanics), deforms (flows) under an applied shear stress, or external force. ...
for their customers, paying
cheques A cheque, or check (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the Unit ...
drawn on them and also collecting
cheques A cheque, or check (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the Unit ...
for their customers. In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including
cheques A cheque, or check (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the Unit ...
, 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: * "banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (
Singapore Singapore (), officially the Republic of Singapore, is a sovereign state, sovereign island city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...

Singapore
), Section 2, Interpretation). * "banking business" means the business of either or both of the following: # receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than
months
 months
... or with a period of call or notice of less than that period; # paying or collecting cheques drawn by or paid in by customers. Since the advent of
EFTPOS Electronic funds transfer at point of sale (EFTPOS; ) is an electronic payment system An e-commerce payment system (or an electronic payment system) facilitates the acceptance of electronic payment for e-commerce, online transactions. Also known ...
(Electronic Funds Transfer at Point Of Sale), direct credit,
direct debit A direct debit or direct withdrawal is a financial transaction in which one person (or company) withdraws funds from another person's bank account. Formally, the person who directly draws the funds ("the payee") instructs their bank to collect (i.e. ...
and
internet banking Online banking, also known as internet banking, web banking or home banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial insti ...
, 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
cheque A cheque, or check (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the Unit ...
s 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 transfer Wire transfer, bank transfer, or credit transfer, is a method of electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account A bank account is a financial account maintained by a ban ...
s or
telegraphic transfer Telegraphic Transfer or telex transfer, often abbreviated to TT, is a term used to refer to an electronic means of transferring funds. A transfer charge is often charged by the sending bank and in some cases by the receiving bank. Historically te ...
,
EFTPOS Electronic funds transfer at point of sale (EFTPOS; ) is an electronic payment system An e-commerce payment system (or an electronic payment system) facilitates the acceptance of electronic payment for e-commerce, online transactions. Also known ...
, and
automated teller machine An automated teller machine (ATM) or cash machine (in British English British English (BrE) is the standard dialect A standard language (also standard variety, standard dialect, and standard) is a language variety that has undergo ...
s (ATMs). Banks borrow money by accepting funds deposited on current accounts, by accepting
term deposit A time deposit or term deposit (in the United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. I ...
s, and by issuing debt securities such as
banknotes A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes w ...
and bonds. Banks lend money by making advances to customers on current accounts, by making
installment loanAn installment loan is a type of agreement or contract A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable becaus ...
s, 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 The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

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
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
UK
and many other Western economies after 2007.


Range of activities

Activities undertaken by banks include personal banking,
corporate banking Wholesale banking is the provision of services by bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peop ...
,
investment banking An investment bank is a financial services Financial services are the economic services provided by the finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is conce ...
,
private banking Private banking is bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by ...
, transaction banking,
insurance Insurance is a means of protection from financial loss. It is a form of risk management Risk management is the identification, evaluation, and prioritization of risk In simple terms, risk is the possibility of something bad happening. ...

insurance
,
consumer finance An alternative financial service (AFS) is a financial service Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit ...
,
trade finance Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as bank A bank is a ...
and other related.


Channels

Banks offer many different channels to access their banking and other services: * Branch, in-person banking in a retail location * Automated teller machine banking adjacent to or remote from the bank * Bank by mail: Most banks accept cheque deposits via mail and use mail to communicate to their customers *
Online banking Online banking, also known as internet banking, web banking or home banking, is an electronic payment system An e-commerce payment system (or an electronic payment system) facilitates the acceptance of electronic payment for e-commerce, online ...
over the Internet to perform multiple types of transactions *
Mobile banking Mobile banking is a service provided by a bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a ...
is using one's mobile phone to conduct banking transactions *
Telephone banking Telephone banking is a service provided by a bank or other financial institution, that enables customers to perform over the telephone a range of financial transactions which do not involve cash or Financial instruments (such as cheques), without t ...
allows customers to conduct transactions over the telephone with an
automated attendant In telephony Telephony ( ) is the field of technology involving the development, application, and deployment of telecommunication services for the purpose of electronic transmission of voice, fax, or data, between distant parties. The history o ...
, or when requested, with a telephone operator * Video banking performs banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine) or via a
video conference Videotelephony comprises the technologies for the reception and transmission of audio signal, audio-video signals by users in different locations, for communication between people in real time.McGraw-Hill Concise Encyclopedia of EngineeringVideot ...
enabled bank branch clarification * Relationship manager, mostly for private banking or business banking, who visits customers at their homes or businesses * Direct Selling Agent, who works for the bank based on a contract, whose main job is to increase the customer base for the bank


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 In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

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 The business cycle, also known as the economic cycle or trade cycle, are the fluctuations of gross domestic product Gross domestic product (GDP) is a monetary Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the pl ...

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. * First, this includes the
Gramm–Leach–Bliley Act The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, () is an act of the 106th United States Congress The 106th United States Congress was a meeting of the legislative branch of the United Sta ...
, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling
cross-selling Cross-selling is the action or practice of selling an additional product or service to an existing customer. In practice, businesses define cross-selling in many different ways. Elements that might influence the definition might include the size o ...
of products (which, the banks hope, will also increase profitability). * Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of
default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It ...
on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit. * Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include
debit card A debit card (also known as a bank card, plastic card or check card) is a payment card that can be used in place of cash to make purchases. It is similar to a credit card, but unlike a credit card, the money for the purchase must be in the cardho ...
s, prepaid cards,
smart card A smart card, chip card, or integrated circuit card (ICC or IC card) is a physical electronic authorization device, used to control access to a resource. It is typically a plastic credit card #REDIRECT Credit card A credit card is a paym ...
s, and
credit card #REDIRECT Credit card #REDIRECT Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for ...

credit card
s. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). :However, with the convenience of easy credit, there is also 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 cardholders, and transaction fees to retailers who accept the bank's credit and/or debit cards for payments. 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

*
Savings account A savings account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried ...
* Recurring deposit account * Fixed deposit account *
Money market account A money market account (MMA) or money market deposit account (MMDA) is a deposit account A deposit account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial t ...
*
Certificate of deposit A certificate of deposit (CD) is a time deposit A time deposit or term deposit (in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United Stat ...

Certificate of deposit
(CD) *
Individual retirement account An individual retirement account (IRA) in the United States is a form of "individual retirement plan", provided by many financial institutions, that provides tax advantage Tax advantage refers to the economic bonus which applies to certain account ...
(IRA) *
Credit card #REDIRECT Credit card #REDIRECT Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for ...

Credit card
*
Debit card A debit card (also known as a bank card, plastic card or check card) is a payment card that can be used in place of cash to make purchases. It is similar to a credit card, but unlike a credit card, the money for the purchase must be in the cardho ...
*
Mortgage A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
*
Mutual fund A mutual fund is a professionally managed investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the ri ...
*
Personal loan In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, i ...
*
Time deposits A time deposit or term deposit (in the United States also known as a certificate of deposit) is a Deposit account, deposit in a financial institution with a specific Maturity (finance), maturity date or a period to maturity, commonly referred to as ...
*
ATM card ATM or atm often refers to: * Atmosphere (unit) The standard atmosphere (symbol: atm) is a measurement unit, unit of pressure defined as 101,325 pascal (unit), Pa. It is sometimes used as a ''reference pressure'' or ''standard pressure''. It is ...
*
Current accounts Currents or The Current may refer to: Science and technology * Current (fluid) A current in a fluid In physics, a fluid is a substance that continually Deformation (mechanics), deforms (flows) under an applied shear stress, or external force. ...
* Cheque books *
Automated Teller Machine An automated teller machine (ATM) or cash machine (in British English British English (BrE) is the standard dialect A standard language (also standard variety, standard dialect, and standard) is a language variety that has undergo ...
(ATM) *
National Electronic Fund Transfer National Electronic Funds Transfer (NEFT) is an electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account A bank account is a financial account maintained by a bank or other financial ...
(NEFT) *
Real Time Gross SettlementReal Time Gross Settlement, abbreviated as RTGS systems are specialist funds transfer systems where the transfer of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III ar ...
(RTGS)


Business (or commercial/investment) banking

*
Business loanA business loan is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually liable t ...
* Capital raising (
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
/
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
/ hybrids) *
Revolving credit Revolving credit is a type of credit px, Domestic credit to private sector in 2005 Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was origina ...
*
Risk management Risk management is the identification, evaluation, and prioritization of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving ...

Risk management
(
foreign exchange The foreign exchange market (Forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) market for the trading of currency, currencies. This market determines Exchange rate ...
(FX)),
interest rate An interest rate is the amount of interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is disti ...
s,
commodities In economics, a commodity is an economic goods, good, usually a resource, that has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to who Production ...
,
derivatives Derivative may refer to: In mathematics and economics *Brzozowski derivative in the theory of formal languages *Derivative in calculus, a quantity indicating how a function changes when the values of its inputs change. *Formal derivative, an opera ...
* Term loan * Cash management services (lock box, remote deposit capture, merchant processing) * Credit services


Capital and risk

Banks face a number of
risks In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to ...
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 Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
a bank is required to hold. Bank capital consists principally of
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
,
retained earnings The retained earnings (also known as plowback) of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by pri ...
and
subordinated debt In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
. After the 2007-2009 financial crisis, 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 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: *
Credit risk A credit risk is risk of default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they ope ...
: risk of loss arising from a borrower who does not make payments as promised. *
Liquidity risk Liquidity risk is a financial risk Financial risk is any of various types of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations invol ...
: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). *
Market risk Market risk is the risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to pred ...
: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. *
Operational risk Operational risk is "the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses" ...
: risk arising from execution of a company's business functions. *
Reputational risk Reputational damage is the loss to financial capital Financial capital (also simply known as capital or equity in finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. I ...
: a type of risk related to the trustworthiness of business. * Macroeconomic risk: risks related to the aggregate economy the bank is operating in. The
capital requirement A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio o ...
is a
bank regulation Bank regulation is a form of government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthl ...
, which sets a framework within which a bank or depository institution must manage its
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such ...

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: # Issue of money, in the form of
banknotes A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes w ...
and current accounts subject to
cheque A cheque, or check (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the Unit ...
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. # 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. # Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. # 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. # Asset liability mismatch/
Maturity transformationMaturity transformation is the practice by financial institutions of borrowing money on shorter timeframes than they lend money out. Financial markets also have the effect of maturity transformation whereby investors such as shareholders and bondhold ...
– 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). #
Money creation Money creation, or money issuance, is the process by which the money supply In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time in an economy. There are ...
/destruction – whenever a bank gives out a loan in a
fractional-reserve banking Fractional-reserve banking is the system of banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peo ...
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 Liquidity risk is a financial risk Financial risk is any of various types of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations invol ...
(where many depositors may request withdrawals in excess of available funds),
credit risk A credit risk is risk of default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they ope ...
(the chance that those who owe money to the bank will not repay it), and
interest rate risk Interest rate risk is the risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to ...
(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 a banking sector as a whole. Prominent examples include the
bank run A bank run (also known as a run on the bank) occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system ( ...
that occurred during the
Great Depression The Great Depression was a severe worldwide economic depression An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recess ...
, the U.S.
Savings and Loan crisis The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of 1,043 out of the 3,234 savings and loan association A savings and loan association (S&L), or thrift institution, is a financial institution ...
in the 1980s and early 1990s, the
Japan Japan ( ja, 日本, or , and formally ) is an island country An island country or an island nation is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the land of an in ...

Japan
ese 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. charts 7–8 The
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

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). 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 China (), officially the People's Republic of China (PRC; ), is a country in East Asia East Asia is the eastern region of Asia Asia () is Earth's largest and most populous continent, located primarily in the Eastern Hemisphere ...

China
's top 4 banks have in excess of 67,000 branches (
ICBC Industrial and Commercial Bank of China Limited (; abb. ICBC) is a . Founded as a on 1 January 1984, ICBC is a . With provided by the , the bank's in 2013 was the largest of one thousand global banks, being the first bank headquartered in ...
:18000+,
BOC
BOC
:12000+, CCB:13000+,
ABC ABC are the first three letters of the Latin script known as the alphabet. ABC or abc may also refer to: Arts, entertainment, and media Broadcasting * American Broadcasting Company, a commercial U.S. TV broadcaster ** Disney–ABC Television ...
:24000+) with an additional 140 smaller banks with an undetermined number of branches.
Japan Japan ( ja, 日本, or , and formally ) is an island country An island country or an island nation is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the land of an in ...

Japan
had 129 banks and 12,000 branches. In 2004,
Germany ) , image_map = , map_caption = , map_width = 250px , capital = Berlin Berlin (; ) is the Capital city, capital and List of cities in Germany by population, largest city of Germany by both area and population. Its 3,769,495 inh ...

Germany
,
France France (), officially the French Republic (french: link=no, République française), is a transcontinental country This is a list of countries located on more than one continent A continent is one of several large landmasses ...

France
, and
Italy Italy ( it, Italia ), officially the Italian Republic ( it, Repubblica Italiana, links=no ), is a country consisting of Italian Peninsula, a peninsula delimited by the Alps and List of islands of Italy, several islands surrounding it, whose ...

Italy
each had more than 30,000 branches – more than double the 15,000 branches in the
UK
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 (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:


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 A central bank, reserve bank, or monetary authority is an institution that manages the currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money ...

central bank
. Central banks also typically have a monopoly on the business of issuing
banknote A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
s. However, in some countries this is not the case. In the UK, for example, the
Financial Services Authority The Financial Services Authority (FSA) was a quasi-judicial body A quasi-judicial body is a non-judicial body which can interpret law. It is an entity such as an Arbitration panel or tribunal board, that can be a public administrative agency but ...
licenses banks, and some commercial banks (such as the
Bank of Scotland The Bank of Scotland plc is a commercial Commercial may refer to: * a dose of advertising conveyed through media (such as - for example - radio or television) ** Radio advertisement ** Television advertisement * (adjective for:) commerce, a ...

Bank of Scotland
) issue their own banknotes in addition to those issued by the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker, and still one of the bankers for t ...

Bank of England
, the UK government's central bank. 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: * The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank. * * The bank agrees to pay the customer's checks up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit. * * The bank may not pay from the customer's account without a mandate from the customer, e.g. a cheque drawn by the customer. * * The bank agrees to promptly collect the cheques deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account. * * And, the bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship. * * The bank has a
lien A lien ( or ) is a form of security interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and inv ...

lien
on cheques deposited to the customer's account, to the extent that the customer is indebted to the bank. * * The bank must not disclose details of transactions through the customer's account – unless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it. * * The bank must not close a customer's account without reasonable notice, since cheques are outstanding in the ordinary course of business for several days. 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 A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services Financial services are the Service (economics), economic services provided by the fi ...
and
credit unions A credit union, a type of financial institution Financial institutions, otherwise known as banking institutions, are corporations that provide services as intermediaries of financial markets. Broadly speaking, there are three major types of f ...
, 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: * Minimum capital * Minimum capital ratio * 'Fit and Proper' requirements for the bank's controllers, owners, directors, or senior officers * Approval of the bank's business plan as being sufficiently prudent and plausible.


Different types of banking

Banks' activities can be divided into: *
retail banking Retail banking, also known as consumer banking or personal banking, is the provision of services by a bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A co ...
, dealing directly with individuals and small businesses; *
business banking 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 It can also refer to a bank, or a division of a large bank, which deals with corporat ...
, providing services to mid-market business; *
corporate banking Wholesale banking is the provision of services by bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peop ...
, directed at large business entities; *
private banking Private banking is bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by ...
, providing wealth management services to
high-net-worth individual High-net-worth individual (HNWI) is a term used by some segments of the financial services Financial services are the economic services provided by the finance Finance is a term for the management, creation, and study of money In a ...
s and families; *
investment banking An investment bank is a financial services Financial services are the economic services provided by the finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is conce ...
, relating to activities on the
financial markets A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *M ...
. Most banks are profit-making, private enterprises. However, some are owned by government, or are
non-profit organization A nonprofit organization (NPO), also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in contrast with an entity that o ...
s.


Types of bank

*
Commercial bank A commercial bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity) ...
s: the term used for a normal bank to distinguish it from an investment bank. After the
Great Depression The Great Depression was a severe worldwide economic depression An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recess ...
, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to
capital market 200px, The trading floor of the New York Stock Exchange, one of the largest secondary capital markets in the world. Most of the trades on the New York Stock Exchange are executed electronically, but its hybrid structure allows some trading to be ...
activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses. * Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. *
Community development bank Community development bank (CDB) or Community Development Financial Institution (CDFI) is a development bank or credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned financial cooperative ...
s: regulated banks that provide financial services and credit to under-served markets or populations. *
Land development bank#REDIRECT Land development bank A land development bank ( bn, ভূমি উন্নয়ন ব্যাংক), abbreviated LDB, is a special kind of bank A bank is a financial institution that accepts Deposit account, deposits from th ...
s: The special banks providing long-term loans are called
land development bank#REDIRECT Land development bank A land development bank ( bn, ভূমি উন্নয়ন ব্যাংক), abbreviated LDB, is a special kind of bank A bank is a financial institution that accepts Deposit account, deposits from th ...
s (LDB). The history of LDB is quite old. The first LDB was started at Jhang in
Punjab Punjab (; ; ; ; also as Panjāb or Panj-Āb) is a geopolitical, cultural, and in , specifically in the northern part of the , comprising areas of eastern and . The boundaries of the region are ill-defined and focus on historical accounts. ...

Punjab
in 1920. The main objective of the LDBs are to promote the development of land, agriculture and increase the agricultural production. The LDBs provide long-term finance to members directly through their branches. *
Credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned financial cooperative, controlled by its members and operated on a not-for-profit basis. Credit unions generally provide services to members simila ...
s or co-operative banks: not-for-profit
cooperatives A cooperative (also known as co-operative, co-op, or coop) is "an autonomous The federal subject The federal subjects of Russia, also referred to as the subjects of the Russian Federation (russian: субъекты Российск ...
owned by the depositors and often offering rates more favourable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined area, members of a certain union or religious organizations, and their immediate families. * Postal savings banks: savings banks associated with national postal systems. * Private banks: banks that manage the assets of high-net-worth individuals. Historically a minimum of US$1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to US$350,000 for private investors. *
Offshore bank An offshore bank is a bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized ...
s: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. *
Savings bank A savings bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), ...
: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralized distribution network, providing local and regional outreach – and by their socially responsible approach to business and society. *
Building societies A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services Financial services are the Service (economics), economic services provided by the fi ...
and
Landesbank The Landesbanken in Germany are a group of state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper ...
s: institutions that conduct retail banking. * Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially responsible investments. * A direct or internet-only bank is a banking operation without any physical bank branches. Transactions are usually accomplished using
ATMsATMS may refer to * Advanced Traffic Management System for highways. * Advanced Train Management System for railways. * IBM Administrative Terminal System#ATMS, IBM's successor to ATS/360, {{disambiguation ...
and electronic transfers and
direct depositA direct deposit (or direct credit), in banking, is a deposit of money by a payer directly into a payee's bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions be ...
s through an online interface.


Types of investment banks

*
Investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is a term for the management, creati ...
s " underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, provide
investment management Investment management is the professional asset management Asset management refers to a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It ...
, and advise corporations on
capital market 200px, The trading floor of the New York Stock Exchange, one of the largest secondary capital markets in the world. Most of the trades on the New York Stock Exchange are executed electronically, but its hybrid structure allows some trading to be ...
activities such as mergers and acquisitions. *
Merchant bank A merchant bank is historically a bank dealing in commercial loans and investment. In modern British usage it is the same as an investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. In ...
s were traditionally banks which engaged in
trade finance Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as bank A bank is a ...
. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike
venture cap Venture may refer to: Arts and entertainment Music *The Ventures, an American instrumental rock band formed in 1958 *"A Venture", 1971 song by the band Yes (band), Yes *''Venture'', a 2010 EP by AJR (band), AJR Games *Venture (video game), ...
s, they tend not to invest in new companies.


Combination banks

*
Universal bank A universal bank participates in many kinds of banking activities and is both a commercial bank and an investment bank as well as providing other financial services Financial services are the Service (economics), economic services provided by ...
s, more commonly known as
financial services Financial services are the economic services provided by the finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contra ...
companies, engage in several of these activities. These big banks are very diversified groups that, among other services, also distribute insurance – hence the term
bancassurance Bancassurance is a relationship between a bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly perfo ...
, a
portmanteau word A portmanteau (, ) or portmanteau word (from "portmanteau (luggage) A portmanteau is a piece of luggage Baggage or luggage consists of bags, cases, and containers which hold a travel Travel is the movement of people between distant ...

portmanteau word
combining "banque or bank" and "assurance", signifying that both banking and insurance are provided by the same corporate entity.


Other types of banks

*
Central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money ...

Central bank
s are normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the cash
interest rate An interest rate is the amount of interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is disti ...
. They generally provide liquidity to the banking system and act as the
lender of last resort headquarters in Washington, D.C. ) , image_skyline = , image_caption = Clockwise from top left: the Washington Monument and Lincoln Memorial on the National Mall The National Mall is a Landscape ar ...
in event of a crisis. *
Islamic bank Islamic banking, Islamic finance ( ar, مصرفية إسلامية), or Sharia-compliant finance is banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A ...
s adhere to the concepts of
Islamic law Sharia (; ar, شريعة, sharīʿa ) is a religious law Religious law includes ethical and moral codes taught by religious traditions. Different religious systems hold sacred law in a greater or lesser degree of importance to their beli ...
. This form of banking revolves around several well-established principles based on Islamic laws. All banking activities must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit ( markup) and fees on the financing facilities that it extends to customers.


Challenges within the banking industry


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 The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from los ...
(FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the
Federal Reserve The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central bank A central bank, reserve bank, or monetary authority is an institution that manages the and of a or formal monetary union, and ove ...

Federal Reserve
is the primary federal regulator for Fed-member state banks; the
Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury The Department of the Treasury (USDT) is the national treasury A treasury is either *A government department re ...
(OCC) 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 The Federal Financial Institutions Examination Council (FFIEC) is a formal U.S. government The federal government of the United States (U.S. federal government or U.S. government) is the national government of the United States ...
(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 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 Asset quality is an evaluation of asset to measure the credit risk associated with it. Description Asset quality is related to the left-hand side of the bank A bank is a financial institution that accepts Deposit account, deposits from the ...
has become a big problem for financial institutions. 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 Financial instruments are monetary Contract, contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in ...
, through
financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securities include stocks and Bond (finance), bonds, ra ...
operations such as
brokerage A broker is a person or firm who arranges transactions between a Purchasing, buyer and a sales, seller for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a :wikt:principa ...
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 United States Department of the Treasury, 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: * Passbook or ordinary deposit accounts  – permit any amount to be added to or withdrawn from the account at any time. * NOW and Super NOW accounts  – function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts. *
Money market account A money market account (MMA) or money market deposit account (MMDA) is a deposit account A deposit account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial t ...
s  – carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance. * Certificate accounts  – subject to loss of some or all interest on withdrawals before maturity. * Notice accounts  – the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal. *
Individual retirement account An individual retirement account (IRA) in the United States is a form of "individual retirement plan", provided by many financial institutions, that provides tax advantage Tax advantage refers to the economic bonus which applies to certain account ...
s (IRAs) and Keogh plans  – a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal. * Checking accounts  – offered by some institutions under definite restrictions. * All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons. * Club accounts and other savings accounts  – designed to help people save regularly to meet certain goals.


Types of accounts

Bank statements are accounting records produced by banks under the various accounting standards of the world. Under Generally accepted accounting principles, 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 (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 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 financial crisis of 2007–2008, 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 these 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 Terminal, 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.


See also

Types of institutions: * Bad bank * Bankers' bank * Building society * Cooperative bank *
Credit union A credit union, a type of financial institution similar to a commercial bank, is a member-owned financial cooperative, controlled by its members and operated on a not-for-profit basis. Credit unions generally provide services to members simila ...
* Ethical bank * Industrial loan company * Islamic banking * Mortgage bank * Mutual savings bank *
Offshore bank An offshore bank is a bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized ...
* Person-to-person lending * Public bank * Savings and loan association *
Savings bank A savings bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), ...
* Sparebank Terms and concepts: * Banking agent * Bank regulation * Bankers' bonuses * Call report * Cheque * Electronic funds transfer * Factoring (finance) * Finance * Fractional-reserve banking * Full-reserve banking * Hedge fund * IBAN * Internet banking * Investment banking *
Mobile banking Mobile banking is a service provided by a bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a ...
* Money * Money laundering Terms and concepts: * Narrow banking * Overdraft * Overdraft protection * Piggy bank * Pigmy Deposit Scheme * Private banking * Stockbroker * Substitute check * SWIFT * Tax haven * Venture capital * Wealth management *
Wire transfer Wire transfer, bank transfer, or credit transfer, is a method of electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account A bank account is a financial account maintained by a ban ...
Crime: * Bank fraud * Bank robbery * Cheque fraud * Mortgage fraud Cyber Crime Lists: * List of largest banks * List of accounting topics * List of bank mergers in United States * List of banks * List of economics topics * List of finance topics * List of largest U.S. bank failures * List of oldest banks * List of stock exchanges Banking by country * Banking in Australia * Banking in Austria * Banking in Bangladesh * Banking in Canada * Banking in China * Banking in France * Banking in Germany * Banking in Greece * Banking in Hong Kong * Banking in Iran * Banking in India * Banking in Israel * Banking in Italy * Banking in Pakistan * Banking in Russia * Banking in Singapore * Banking in Switzerland * Banking in Tunisia * Banking in the United Kingdom * Banking in the United States


References


External links


Guardian Datablog – World's Biggest Banks
from ''UCB Libraries GovPubs'' *
A Guide to the National Banking System
' (PDF).
Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury The Department of the Treasury (USDT) is the national treasury A treasury is either *A government department re ...
(OCC), Washington, D.C. Provides an overview of the national banking system of the US, its regulation, and the OCC. {{Use dmy dates, date=December 2019 Banks, Banking, Legal entities Italian inventions Economic history of Italy Financial services