A bank is a financial institution that accepts deposits from the
public and creates credit.
Lending activities can be performed
either directly or indirectly through capital markets. Due to their
importance in the financial stability of a country, banks are highly
regulated in most countries. Most nations have institutionalized a
system known as fractional reserve banking under which banks hold
liquid assets equal to only a portion of their current liabilities. In
addition to other regulations intended to ensure liquidity, banks are
generally subject to minimum capital requirements based on an
international set of capital standards, known as the Basel Accords.
Banking in its modern sense evolved in the 14th century in the
prosperous cities of
Renaissance Italy but in many ways was a
continuation of ideas and concepts of credit and lending that had
their roots in the ancient world. In the history of banking, a number
of banking dynasties – notably, the Medicis, the Fuggers, the
Welsers, the Berenbergs and the Rothschilds – have played a
central role over many centuries. The oldest existing retail bank is
Banca Monte dei Paschi di Siena, while the oldest existing merchant
bank is Berenberg Bank.
3.1 Standard business
3.2 Range of activities
3.4 Business models
3.5.2 Business (or commercial/investment) banking
4 Capital and risk
5 Banks in the economy
5.1 Economic functions
5.3 Size of global banking industry
5.4 Mergers and Acquisitions
7 Types of banking
7.1 Types of banks
7.2 Types of investment banks
7.3 Both combined
7.4 Other types of banks
8 Challenges within the banking industry
8.1 United States
Loan activities of banks
9 Types of accounts
9.1 Brokered deposits
9.2 Custodial accounts
10 Globalization in the banking industry
11 See also
13 External links
Credit · Debt
Unsecured personal loan
Refund anticipation loan
Employee stock option
Main article: History of banking
Among many other things, the
Code of Hammurabi
Code of Hammurabi from 1754 BC recorded
Banking began with the first prototype banks of merchants of the
ancient world, which made grain loans to farmers and traders who
carried goods between cities and this system is known as a barter
system.This began around 2000 BC in
Assyria and Babylonia. Later, in
ancient Greece and during the Roman Empire, lenders based in temples
made loans and added two important innovations: they accepted deposits
and changed money. Archaeology from this period in ancient China and
India also shows evidence of money lending activity.
The origins of modern banking can be traced to medieval and early
Renaissance Italy, to the rich cities in the centre and north like
Florence, Lucca, Siena,
Venice and Genoa. The Bardi and Peruzzi
families dominated banking in 14th-century Florence, establishing
branches in many other parts of Europe. One of the most famous
Italian banks was the Medici Bank, set up by Giovanni di Bicci de'
Medici in 1397. The earliest known state deposit bank, Banco di San
Bank of St. George), was founded in 1407 at Genoa, Italy.
Modern banking practices, including fractional reserve banking and the
issue of banknotes, emerged in the 17th and 18th centuries. Merchants
started to store their gold with the goldsmiths of London, who
possessed private vaults, and charged a fee for that service. In
exchange for each deposit of precious metal, the goldsmiths issued
receipts certifying the quantity and purity of the metal they held as
a bailee; these receipts could not be assigned, only the original
depositor could collect the stored goods.
The sealing of the
Bank of England
Bank of England Charter (1694).
Gradually the goldsmiths began to lend the money out on behalf of the
depositor, which led to the development of modern banking practices;
promissory notes (which evolved into banknotes) were issued for money
deposited as a loan to the goldsmith. The goldsmith paid interest
on these deposits. Since the promissory notes were payable on demand,
and the advances (loans) to the goldsmith's customers were repayable
over a longer time period, this was an early form of fractional
reserve banking. The promissory notes developed into an assignable
instrument which could circulate as a safe and convenient form of
money backed by the goldsmith's promise to pay, allowing goldsmiths
to advance loans with little risk of default. Thus, the goldsmiths
London became the forerunners of banking by creating new money
based on credit.
Bank of England
Bank of England was the first to begin the permanent issue of
banknotes, in 1695. The
Royal Bank of Scotland
Royal Bank of Scotland established the
first overdraft facility in 1728. By the beginning of the 19th
century a bankers' clearing house was established in
London to allow
multiple banks to clear transactions. The Rothschilds pioneered
international finance on a large scale, financing the purchase of the
Suez canal for the British government.
A 640 BC one-third stater electrum coin from Lydia, where gold and
silver coins were used for the first time
The word bank was borrowed in
Middle English from Middle French
banque, from Old Italian banca, meaning "table", from Old High German
banc, bank "bench, counter". Benches were used as makeshift desks or
exchange counters during the
Renaissance by Jewish Florentine
bankers, who used to make their transactions atop desks covered by
The definition of a bank varies from country to country. See the
relevant country pages under for more information.
Under English common law, a banker is defined as a person who carries
on the business of banking, which is specified as:
conducting current accounts for his customers,
paying cheques drawn on him/her and
collecting cheques for his/her customers.
Banco de Venezuela
Banco de Venezuela in Coro.
Branch of Nepal
Bank in Pokhara, Western Nepal.
In most common law jurisdictions there is a Bills of Exchange Act that
codifies the law in relation to negotiable instruments, including
cheques, and this Act contains a statutory definition of the term
banker: banker includes a body of persons, whether incorporated or
not, who carry on the business of banking' (Section 2,
Interpretation). Although this definition seems circular, it is
actually functional, because it ensures that the legal basis for bank
transactions such as cheques does not depend on how the bank is
structured or regulated.
The business of banking is in many
English common law
English common law countries not
defined by statute but by common law, the definition above. In other
English common law
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
Banking Act (Singapore), Section 2, Interpretation).
"banking business" means the business of either or both of the
receiving from the general public money on current, deposit, savings
or other similar account repayable on demand or within less than [3
months] ... or with a period of call or notice of less than that
paying or collecting cheques drawn by or paid in by customers.
Since the advent of
EFTPOS (Electronic Funds Transfer at Point Of
Sale), direct credit, direct debit and internet banking, the cheque
has lost its primacy in most banking systems as a payment instrument.
This has led legal theorists to suggest that the cheque based
definition should be broadened to include financial institutions that
conduct current accounts for customers and enable customers to pay and
be paid by third parties, even if they do not pay and collect cheques
Large door to an old bank vault.
Banks act as payment agents by conducting checking or current accounts
for customers, paying cheques drawn by customers in the bank, and
collecting cheques deposited to customers' current accounts. Banks
also enable customer payments via other payment methods such as
Automated Clearing House
Automated Clearing House (ACH), Wire transfers or telegraphic
transfer, EFTPOS, and automated teller machines (ATMs).
Banks borrow money by accepting funds deposited on current accounts,
by accepting term deposits, and by issuing debt securities such as
banknotes and bonds. Banks lend money by making advances to customers
on current accounts, by making installment loans, and by investing in
marketable debt securities and other forms of money lending.
Banks provide different payment services, and a bank account is
considered indispensable by most businesses and individuals. Non-banks
that provide payment services such as remittance companies are
normally not considered as an adequate substitute for a bank account.
Banks can create new money when they make a loan. New loans throughout
the banking system generate new deposits elsewhere in the system. The
money supply is usually increased by the act of lending, and reduced
when loans are repaid faster than new ones are generated. In the
United Kingdom between 1997 and 2007, there was an increase in the
money supply, largely caused by much more bank lending, which served
to push up property prices and increase private debt. The amount of
money in the economy as measured by M4 in the UK went from £750
billion to £1700 billion between 1997 and 2007, much of the increase
caused by bank lending. If all the banks increase their lending
together, then they can expect new deposits to return to them and the
amount of money in the economy will increase. Excessive or risky
lending can cause borrowers to default, the banks then become more
cautious, so there is less lending and therefore less money so that
the economy can go from boom to bust as happened in the UK and many
other Western economies after 2007.
Range of activities
Activities undertaken by banks include personal banking, corporate
banking, investment banking, private banking, transaction banking,
insurance, consumer finance, foreign exchange trading, commodity
trading, trading in equities, futures and options trading and money
An American bank in Maryland.
Banks offer many different channels to access their banking and other
Branch, in-person banking in a retail location
Automated teller machine
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 over the Internet to perform multiple types of
Mobile banking is using one's mobile phone to conduct banking
Telephone banking allows customers to conduct transactions over the
telephone with an automated attendant, or when requested, with a
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
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
A bank can generate revenue in a variety of different ways including
interest, transaction fees and financial advice. Traditionally, the
most significant method is via charging interest on the capital it
lends out to customers. The bank profits from the
difference between the level of interest it pays for deposits and
other sources of funds, and the level of interest it charges in its
This difference is referred to as the spread between the cost of funds
and the loan interest rate. Historically, profitability from lending
activities has been cyclical and dependent on the needs and strengths
of loan customers and the stage of the economic cycle. Fees and
financial advice constitute a more stable revenue stream and banks
have therefore placed more emphasis on these revenue lines to smooth
their financial performance.
In the past 20 years, American banks have taken many measures to
ensure that they remain profitable while responding to increasingly
changing market conditions.
First, this includes the Gramm–Leach–Bliley Act, 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 of products (which, the banks hope, will also
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 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 cards, prepaid cards, smart cards, and credit cards.
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
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
This helps in making a profit and facilitates economic development as
A former building society, now a modern retail bank in Leeds, West
An interior of a branch of
National Westminster Bank
National Westminster Bank on Castle Street,
Recurring deposit account
Fixed deposit account
Money market account
Certificate of deposit
Certificate of deposit (CD)
Individual retirement account
Individual retirement account (IRA)
Automated Teller Machine
Automated Teller Machine (ATM)
Business (or commercial/investment) banking
Capital raising (equity / debt / hybrids)
Risk management (foreign exchange (FX)), interest rates, commodities,
Cash management services (lock box, remote deposit capture, merchant
Capital and risk
Banks face a number of risks in order to conduct their business, and
how well these risks are managed and understood is a key driver behind
profitability, and how much capital a bank is required to hold. Bank
capital consists principally of equity, retained earnings and
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: risk of loss arising from a borrower who does not make
payments as promised.
Liquidity risk: risk that a given security or asset cannot be traded
quickly enough in the market to prevent a loss (or make the required
Market risk: 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: risk arising from execution of a company's business
Reputational risk: a type of risk related to the trustworthiness of
Macroeconomic risk: risks related to the aggregate economy the bank is
The capital requirement is a bank regulation, which sets a framework
within which a bank or depository institution must manage its balance
sheet. The categorization of assets and capital is highly standardized
so that it can be risk weighted.
Banks in the economy
SEB main building in Tallinn, Estonia
See also: Financial system
The economic functions of banks include:
Issue of money, in the form of banknotes and current accounts subject
to cheque or payment at the customer's order. These claims on banks
can act as money because they are negotiable or repayable on demand,
and hence valued at par. They are effectively transferable by mere
delivery, in the case of banknotes, or by drawing a cheque that the
payee may bank or cash.
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
Asset liability mismatch/
Maturity transformation – banks borrow more
on demand debt and short term debt, but provide more long term loans.
In other words, they borrow short and lend long. With a stronger
credit quality than most other borrowers, banks can do this by
aggregating issues (e.g. accepting deposits and issuing banknotes) and
redemptions (e.g. withdrawals and redemption of banknotes),
maintaining reserves of cash, investing in marketable securities that
can be readily converted to cash if needed, and raising replacement
funding as needed from various sources (e.g. wholesale cash markets
and securities markets).
Money creation/destruction – whenever a bank gives out a loan in a
fractional-reserve banking system, a new sum of money is created and
conversely, whenever the principal on that loan is repaid money is
Banks are susceptible to many forms of risk which have triggered
occasional systemic crises. These include liquidity risk (where many
depositors may request withdrawals in excess of available funds),
credit risk (the chance that those who owe money to the bank will not
repay it), and interest rate risk (the possibility that the bank will
become unprofitable, if rising interest rates force it to pay
relatively more on its deposits than it receives on its loans).
Banking crises have developed many times throughout history when one
or more risks have emerged for a banking sector as a whole. Prominent
examples include the bank run that occurred during the Great
Depression, the U.S. Savings and
Loan crisis in the 1980s and early
1990s, the Japanese banking crisis during the 1990s, and the sub-prime
mortgage crisis in the 2000s.
Size of global banking industry
Assets of the largest 1,000 banks in the world grew by 6.8% in the
2008/2009 financial year to a record US$96.4 trillion while
profits declined by 85% to US$115 billion. Growth in assets in
adverse market conditions was largely a result of recapitalization. EU
banks held the largest share of the total, 56% in 2008/2009, down from
61% in the previous year. Asian banks' share increased from 12% to 14%
during the year, while the share of US banks increased from 11% to
13%. Fee revenue generated by global investment banking totalled
US$66.3 billion in 2009, up 12% on the previous year.
The United States has the most banks in the world in terms of
institutions (5,330 as of 2015) and possibly branches (81,607 as of
2015). This is an indicator of the geography and regulatory
structure of the USA, resulting in a large number of small to
medium-sized institutions in its banking system. As of November 2009,
China's top 4 banks have in excess of 67,000 branches (ICBC:18000+,
BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller
banks with an undetermined number of branches.
Japan had 129 banks and
12,000 branches. In 2004, Germany, France, and
Italy each had more
than 30,000 branches – more than double the 15,000 branches in
Mergers and Acquisitions
Between 1985 and 2018 banks engaged in around 28,798 mergers or
acquisitions, either as the aqcuirer or the target company. The
overall known value of these deals cumulates to around 5,169 bil.
USD. In terms of value, there have been two major waves (1999 and
2007) which both peaked at around 460 bil. USD followed by a steep
decline (-82% from 2007 until 2018).
Here is a list of the largest deals in history in terms of value with
participation from at least one bank:
Acquiror Mid Industry
Target Mid Industry
Value of Transaction ($mil)
RFS Holdings BV
ABN-AMRO Holding NV
Travelers Group Inc
JPMorgan Chase & Co
Bank One Corp,Chicago,IL
Bank of America Corp
FleetBoston Financial Corp,MA
Bank of America Corp
Merrill Lynch & Co Inc
Royal Bank of Scotland
Royal Bank of Scotland Group
Mitsubishi Tokyo Financial Grp
UFJ Holdings Inc
See also: Basel II
Currently, commercial banks are regulated in most jurisdictions by
government entities and require a special bank license to operate.
Bank regulation and standards
Bank for International Settlements
Basel Accords (Basel I, Basel II, Basel III, Basel IV)
Financial Stability Board
Pillar 1: Regulatory capital
Value at risk
Pillar 2: Supervisory review
Pillar 3: Market disclosure
Business and Economics Portal
Usually, the definition of the business of banking for the purposes of
regulation is extended to include acceptance of deposits, even if they
are not repayable to the customer's order – although money
lending, by itself, is generally not included in the definition.
Unlike most other regulated industries, the regulator is typically
also a participant in the market, being either a publicly or privately
governed central bank. Central banks also typically have a monopoly on
the business of issuing banknotes. However, in some countries this is
not the case. In the UK, for example, the Financial Services Authority
licenses banks, and some commercial banks (such as the
Scotland) issue their own banknotes in addition to those issued by the
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
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
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.
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 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
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
Some types of financial institution, such as building societies and
credit unions, may be partly or wholly exempt from bank license
requirements, and therefore regulated under separate rules.
The requirements for the issue of a bank license vary between
jurisdictions but typically include:
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
Types of banking
Banks' activities can be divided into:
retail banking, dealing directly with individuals and small
business banking, providing services to mid-market business;
corporate banking, directed at large business entities;
private banking, providing wealth management services to
high-net-worth individuals and families;
investment banking, relating to activities on the financial markets.
Most banks are profit-making, private enterprises. However, some are
owned by government, or are non-profit organizations.
Types of banks
Bank of the Republic,
Salt Lake City
Salt Lake City 1908
ATM Al-Rajhi Bank
National Copper Bank,
Salt Lake City
Salt Lake City 1911
A branch of Union
Bank in, Visakhapatnam
Commercial banks: the term used for a normal bank to distinguish it
from an investment bank. After the Great Depression, the U.S. Congress
required that banks only engage in banking activities, whereas
investment banks were limited to capital market 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
Community banks: locally operated financial institutions that empower
employees to make local decisions to serve their customers and the
Community development banks: regulated banks that provide financial
services and credit to under-served markets or populations.
Land development banks: The special banks providing long-term loans
are called land development banks (LDB). The history of LDB is quite
old. The first LDB was started at Jhang in
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 unions or co-operative banks: not-for-profit cooperatives 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
Postal savings banks: savings banks associated with national postal
Private banks: banks that manage the assets of high-net-worth
individuals. Historically a minimum of USD 1 million was required to
open an account, however, over the last years many private banks have
lowered their entry hurdles to USD 350,000 for private
Offshore banks: banks located in jurisdictions with low taxation and
regulation. Many offshore banks are essentially private banks.
Savings bank: 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 and Landesbanks: institutions that conduct retail
Ethical banks: banks that prioritize the transparency of all
operations and make only what they consider to be socially responsible
A direct or internet-only bank is a banking operation without any
physical bank branches, conceived and implemented wholly with
Types of investment banks
Investment banks "underwrite" (guarantee the sale of) stock and bond
issues, trade for their own accounts, make markets, provide investment
management, and advise corporations on capital market activities such
as mergers and acquisitions.
Merchant banks were traditionally banks which engaged in trade
finance. The modern definition, however, refers to banks which provide
capital to firms in the form of shares rather than loans. Unlike
venture caps, they tend not to invest in new companies.
A branch of
Banco de Oro
Banco de Oro in Metro Manila, Philippines
Universal banks, more commonly known as financial services 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, a 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 banks are normally government-owned and charged with
quasi-regulatory responsibilities, such as supervising commercial
banks, or controlling the cash interest rate. They generally provide
liquidity to the banking system and act as the lender of last resort
in event of a crisis.
Islamic banks adhere to the concepts of Islamic law. This form of
banking revolves around several well-established principles based on
Islamic canons. 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
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Banking in the United States
Citibank, The People's Trust Company Building, Brooklyn.
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
Insurance Corporation (FDIC) as a regulator. However,
for soundness examinations (i.e., whether a bank is operating in a
sound manner), the
Federal Reserve is the primary federal regulator
for Fed-member state banks; the Office of the Comptroller of the
Currency (OCC) is the primary federal regulator for national banks;
and the Office of Thrift Supervision, or OTS, is the primary federal
regulator for thrifts. 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 (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
The management of the banks’ asset portfolios also remains a
challenge in today’s economic environment. Loans are a bank’s
primary asset category and when loan quality becomes suspect, the
foundation of a bank is shaken to the core. While always an issue for
banks, declining asset quality has become a big problem for financial
Safra National Bank, New York
There are several reasons for this, one of which is the lax attitude
some banks have adopted because of the years of “good times.” The
potential for this is exacerbated by the reduction in the regulatory
oversight of banks and in some cases depth of management. Problems are
more likely to go undetected, resulting in a significant impact on the
bank when they are discovered. In addition, banks, like any business,
struggle to cut costs and have consequently eliminated certain
expenses, such as adequate employee training programs.
Banks also face a host of other challenges such as ageing ownership
groups. Across the country, many banks’ management teams and board
of directors are ageing. Banks also face ongoing pressure by
shareholders, both public and private, to achieve earnings and growth
projections. Regulators place added pressure on banks to manage the
various categories of risk.
Banking is also an extremely competitive
industry. Competing in the financial services industry has become
tougher with the entrance of such players as insurance agencies,
credit unions, cheque cashing services, credit card companies, etc.
As a reaction, banks have developed their activities in financial
instruments, through financial market operations such as brokerage and
have become big players in such activities.
Loan activities of banks
To be able to provide home buyers and builders with the funds needed,
banks must compete for deposits. The phenomenon of disintermediation
had to dollars moving from savings accounts and into direct market
instruments such as U.S. Department of Treasury obligations, agency
securities, and corporate debt. One of the greatest factors in recent
years in the movement of deposits was the tremendous growth of money
market funds whose higher interest rates attracted consumer
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
Money market accounts – carry a monthly limit of preauthorized
transfers to other accounts or persons and may require a minimum or
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 accounts (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
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
Suburban bank branch
Bank statements are accounting records produced by banks under the
various accounting standards of the world. Under GAAP there are two
kinds of accounts: debit and credit. Credit accounts are Revenue,
Equity and Liabilities. Debit Accounts are Assets and Expenses. The
bank credits a credit account to increase its balance, and debits a
credit account to decrease its balance.
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.
One source of deposits for banks is brokers who deposit large sums of
money on behalf of investors through trust corporations. This money
will generally go to the banks which offer the most favourable terms,
often better than those offered local depositors. It is possible for a
bank to engage in business with no local deposits at all, all funds
being brokered deposits. Accepting a significant quantity of such
deposits, or "hot money" as it is sometimes called, puts a bank in a
difficult and sometimes risky position, as the funds must be lent or
invested in a way that yields a return sufficient to pay the high
interest being paid on the brokered deposits. This may result in risky
decisions and even in eventual failure of the bank. Banks which failed
during 2008 and 2009 in the United States during the global financial
crisis had, on average, four times more brokered deposits as a percent
of their deposits than the average bank. Such deposits, combined with
risky real estate investments, factored into the savings and loan
crisis of the 1980s. Regulation of brokered deposits is opposed by
banks on the grounds that the practice can be a source of external
funding to growing communities with insufficient local deposits.
There are different types of accounts: saving, recurring and current
Custodial accounts are accounts in which assets are held for a third
party. For example, businesses that accept custody of funds for
clients prior to their conversion, return or transfer may have a
custodial account at a bank for this purposes.
Globalization in the banking industry
In modern time there has been huge reductions to the barriers of
global competition in the banking industry. Increases in
telecommunications and other financial technologies, such as
Bloomberg, have allowed banks to extend their reach all over the
world, since they no longer have to be near customers to manage both
their finances and their risk. The growth in cross-border activities
has also increased the demand for banks that can provide various
services across borders to different nationalities. However, despite
these reductions in barriers and growth in cross-border activities,
the banking industry is nowhere near as globalized as some other
industries. In the USA, 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.
Types of institutions:
Industrial loan company
Mutual savings bank
Savings and loan association
Terms and concepts:
Electronic funds transfer
Terms and concepts:
Pigmy Deposit Scheme
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
Bank of England. "Rulebook Glossary".
^ Hoggson, N. F. (1926)
Banking Through the Ages, New York, Dodd, Mead
^ Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in
Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum
^ Macesich, George (30 June 2000). "Central Banking: The Early Years:
Other Early Banks". Issues in
Money and Banking. Westport,
Connecticut: Praeger Publishers (Greenwood Publishing Group).
p. 42. doi:10.1336/0275967778. ISBN 978-0-275-96777-2.
Retrieved 2009-03-12. The first state deposit bank was the
Bank of St.
George in Genoa, which was established in 1407.
^ Thus by the 19th century we find “[i]n 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.” Joseph
Story, Commentaries on the Law of Bailments (1832, p. 66) and
“Money, when paid into a bank, ceases altogether to be the money of
the principal (see Parker v. Marchant, 1 Phillips 360); it is then the
money of the banker, who is bound to return an equivalent by paying a
similar sum to that deposited with him when he is asked for it.”
Lord Chancellor Cottenham,
Foley v Hill
Foley v Hill (1848) 2 HLC 28.
^ Richards. The usual denomination was 50 or 100 pounds, so these
notes were not an everyday currency for the common people
^ Richards, p. 40
^ "A History of British Banknotes". britishnotes.co.uk.
^ "A short history of overdrafts". eccount money. Archived from the
original on 2013-11-05.
^ Morton, Julius Sterling (1898). The Conservative. p. 346.
^ de Albuquerque, Martim (1855). Notes and Queries. London: George
Bell. p. 431.
^ United Dominions Trust Ltd v Kirkwood, 1966, English Court of
Appeal, 2 QB 431
Banking Ordinance, Section 2, Interpretation, Hong Kong) Note that
in this case the definition is extended to include accepting any
deposits repayable in less than 3 months, companies that accept
deposits of greater than HK$100 000 for periods of greater than 3
months are regulated as deposit taking companies rather than as banks
in Hong Kong.
^ e.g. Tyree's
Banking Law in New Zealand, A L Tyree, LexisNexis 2003,
Bank of England
Bank of England statistics and the book "Where does money come
from?", p. 47, by the New Economics Foundation.
^ "How Banks Make Money". The Street. Retrieved 2011-09-08.
^ "Principles for the Management of Credit
Risk – consultative
document". July 1999. Retrieved 28 January 2016.
Credit risk is most
simply defined as the potential that a bank borrower or counterparty
will fail to meet its obligations in accordance with agreed
^ Bolt, Wilko; Leo de Haan; Marco Hoeberichts; Maarten van Oordt; Job
Swank (2012). "
Bank Profitability during Recessions". Journal of
Banking & Finance. 36 (9): 2552–64.
^ a b "
Banking 2010" (PDF). [permanent dead
link] (638 KB) charts 7–8, pages 3–4. TheCityUK.
^ "FDIC: HSOB Commercial Banks". www5.fdic.gov. Retrieved
^ "M&A by Industries - Institute for Mergers, Acquisitions and
Alliances (IMAA)". Institute for Mergers, Acquisitions and Alliances
(IMAA). Retrieved 2018-02-28.
^ TNAU. "Land Development Bank". TNAU Agritech Portal. Retrieved 8
^ Scott Besley and Eugene F. Brigham, Principles of Finance, 4th ed.
(Mason, OH: South-Western Cengage Learning, 2009), 125. This popular
university textbook explains: "Generally speaking, U.S. financial
institutions have been much more heavily regulated and faced greater
limitations ... than have their foreign counterparts."
^ a b Mishler, Lon; Cole, Robert E. (1995). Consumer and business
credit management. Homewood: Irwin. pp. 128–29.
^ Statistics Department (2001). "Source Data for Monetary and
Financial Statistics". Monetary and Financial Statistics: Compilation
Guide. Washington D.C.: International Monetary Fund. p. 24.
ISBN 978-1-58906-584-0. Retrieved 2009-03-14.
^ "For Banks, Wads of
Cash and Loads of Trouble" article by Eric
Lipton and Andrew Martin in
The New York Times
The New York Times July 3, 2009
^ Allen N Berger; Qinglei Dai; Steven Ongena; David C Smith (31 March
2003). "To what extent will the banking industry be globalized? A
study of bank nationality and reach in 20 European nations". Retrieved
28 January 2016.
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