A BANK is a financial institution that accepts deposits from the
public and creates credit .
* 1 History * 2 Etymology
* 3 Definition
* 3.1 Standard business * 3.2 Range of activities * 3.3 Channels * 3.4 Business models
* 3.5 Products
* 3.5.1 Retail * 3.5.2 Business (or commercial/investment) banking
* 4 Capital and risk
* 5 Banks in the economy
* 5.1 Economic functions
* 6 Regulation
* 7 Types of banks
* 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
* 9 Types of accounts
* 9.1 Brokered deposits * 9.2 Custodial accounts
* 10 Globalization in the banking industry * 11 See also * 12 References * 13 External links
CREDIT · DEBT
* v * t * e
The origins of modern banking can be traced to medieval and early
Renaissance Italy , to the rich cities in the centre and north like
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
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 of
Bank of England
The word bank was borrowed in
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.
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 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; (
* receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than ... or with a period of call or notice of less than that period; * 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
Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits , and by issuing debt securities such as banknotes and bonds . Banks lend money by making advances to customers on current accounts, by making installment loans , and by investing in marketable debt securities and other forms of money lending.
Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.
Banks can create new money when they make a loan. New loans throughout the banking system generate new deposits elsewhere in the system. The money supply is usually increased by the act of lending, and reduced when loans are repaid faster than new ones are generated. In the United Kingdom between 1997 and 2007, there was an increase in the money supply, largely caused by much more bank lending, which served to push up property prices and increase private debt. The amount of money in the economy as measured by M4 in the UK went from £750 billion to £1700 billion between 1997 and 2007, much of the increase caused by bank lending. If all the banks increase their lending together, then they can expect new deposits to return to them and the amount of money in the economy will increase. Excessive or risky lending can cause borrowers to default, the banks then become more cautious, so there is less lending and therefore less money so that the economy can go from boom to bust as happened in the UK and many other Western economies after 2007.
RANGE OF ACTIVITIES
Activities undertaken by banks include personal banking , corporate banking , investment banking , private banking , transaction banking , insurance , consumer finance , foreign exchange trading , commodity trading , trading in equities , futures and options trading and money market trading .
Banks offer many different channels to access their banking and other services: An American bank in Maryland.
* Automated teller machines
* A branch in a retail location
* Call centre
* Mail: most banks accept cheque deposits via mail and use mail to
communicate to their customers, e.g. by sending out statements
Mobile banking is a method of using one's mobile phone to conduct
A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. Traditionally, the most significant method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.
This difference is referred to as the spread between highly 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
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.
Business (or Commercial/investment) Banking
* Business loan
* Capital raising (equity / debt / hybrids )
CAPITAL AND RISK
Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Bank capital consists principally of equity , retained earnings and subordinated debt .
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:
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
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
* 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).
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).
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 (
Currently commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate.
BANK REGULATION AND STANDARDS
PILLAR 1: REGULATORY CAPITAL
PILLAR 2: SUPERVISORY REVIEW
PILLAR 3: MARKET DISCLOSURE
Business and Economics
* v * t * e
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 Bank
of Scotland ) issue their own banknotes in addition to those issued by
Bank of England
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. * 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 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 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 * 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.
TYPES OF BANKS
Banks' activities can be divided into:
* retail banking , dealing directly with individuals and small businesses; * 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
* Commercial banks : the term used for a normal bank to distinguish
it from an investment bank. After the
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.
* 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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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
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 shareholders.
The management of the banks’ asset portfolios also remains a
challenge in today’s economic environment. Loans are a bank’s
primary asset category and when loan quality becomes suspect, the
foundation of a bank is shaken to the core. While always an issue for
banks, declining asset quality has become a big problem for financial
institutions. Safra National
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.
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 deposits.
To compete for deposits, US savings institutions offer many different types of plans:
TYPES OF ACCOUNTS
Suburban bank branch
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 accounts.
Custodial accounts are accounts in which assets are held for a third party. For example, businesses that accept custody of funds for clients prior to their conversion, return or transfer may have a custodial account at a bank for this purposes.
GLOBALIZATION IN THE BANKING INDUSTRY
In modern time there has been huge reductions to the barriers of global competition in the banking industry. Increases in telecommunications and other financial technologies, such as Bloomberg, have allowed banks to extend their reach all over the world, since they no longer have to be near customers to manage both their finances and their risk. The growth in cross-border activities has also increased the demand for banks that can provide various services across borders to different nationalities. However, despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalized as some other industries. In the 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:
* Bankers\' bank
TERMS AND CONCEPTS:
* Bankers\' bonuses
TERMS AND CONCEPTS:
List of largest banks
List of accounting topics
List of bank mergers in United States
BANKING BY COUNTRY
* ^ Statistics Department (2001). "Source Data for Monetary and
Financial Statistics". Monetary and Financial Statistics: Compilation
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