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A bank is a monetary establishment that acknowledges stores from general society and makes credit.[1] Lending exercises can be performed either straightforwardly or by Implication through capital business sectors. Because of their significance in the monetary soundness of a nation, banks are profoundly controlled in many nations. Most countries have standardized a framework known as fragmentary save banking under which banks hold fluid resources equivalent to just a bit of their present liabilities. Notwithstanding different guidelines expected to guarantee liquidity, banks are by and large subject to least capital necessities dependent on a worldwide arrangement of capital principles, known as the Basel Accords.

Banking in its cutting edge sense developed in the fourteenth century in the prosperous urban communities of Renaissance Italy however from various perspectives was a continuation of thoughts and ideas of credit and loaning that had their foundations in the antiquated world. Throughout the entire existence of banking, various financial lines – remarkably, the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds – have assumed a focal part over numerous hundreds of years. The most established existing retail bank is Banca Monte dei Paschi di Siena, while the most established existing trader bank is Berenberg Bank.

History


idea of banking may have started in antiquated Babylonia and Old sangvi, with traders offering credits of grain as insurance inside a deal framework.

More current banking can be followed to middle age and early Renaissance Italy, to the rich urban communities in the middle and north like Florence, Lucca, Siena, Venice and Genoa.

Present day banking works on, including partial hold banking and the issue of banknotes, arisen in the seventeenth and eighteenth hundreds of years.

Bit by bit the goldsmiths started to loan the cash out for the benefit of the contributor, which prompted the advancement of current financial practices; promissory notes (which developed into banknotes) were given for cash saved as a credit to the goldsmith.[5] The goldsmith paid revenue on these stores.

The Bank of England was quick to start the lasting issue of banknotes, in 1695.[8] The Royal Bank of Scotland set up the primary overdraft office in 1728.[9] By the start of the nineteenth century a brokers' clearing house was set up in London to permit numerous banks to clear exchanges.

Etymology


The word bank was taken Middle English from Middle French banque, from Old Italian banco, meaning "table", from Old High German banc, bank "bench, counter". Benches were used as makeshift desks or exchange counters during the Renaissance by Jewish[10] Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.[11][12]

Definition


The definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries on the business of banking by conducting current accounts for his customers, paying cheques drawn on him/her and also collecting cheques for his/her customers.[13]

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; (Banking Act (Singapore), Section 2, Interpretation).
  • "banking business" means the business of either or both of the following:

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.[15]

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

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

Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals.

Banks can create new money when they make a loan.

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:

  • 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 over the Internet to perform multiple types of transactions
  • Mobile banking is using one's mobile phone to conduct banking transactions
  • Telephone banking allows customers to conduct transactions over the telephone with an automated attendant, 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 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.

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 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 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.

This helps in making a profit and facilitates economic development as a whole.[18]

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-labelling of banking and payment applications, or the cross-selling of complementory products.[19]

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.[20][21]

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.[22]
  • 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 profit).
  • 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 functions.
  • Reputational risk: a type of risk related to the trustworthiness of business.
  • Macroeconomic risk: risks related to the aggregate economy the bank is operating in.[23]

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:

Bank crisis


Banks are susceptible to many forms of risk which have triggered occasional systemic crises.[24] 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.

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.

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).[26] 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.

Between 1985 and 2018 banks engaged in around 28,798 mergers or acquisitions, either as the acquirer or the target company.

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. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case. In the UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government's central bank.

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.
  • 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.

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 banking


Banks' activities can be divided into:

Most banks are profit-making, private enterprises.

  • 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 businesses.
  • Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.
  • 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.[28]
  • 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 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.[29]
  • 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 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, conceived and implemented wholly with networked Banking in India

Structure of the organised banking sector in India. Numbers of banks are in brackets.

  • 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.
  • 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.
  • 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


The United States banking industry is one of the most heavily regulated and guarded in the world,[30] with multiple specialized and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation (FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks. State non-member banks are examined by the state agencies as well as the FDIC. 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.

In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS, and OCC.

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.

The management of the banks’ asset portfolios also remains a challenge in today's economic environment.

There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of “good times.”

Banks also face a host of other challenges such as ageing ownership groups.

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

Another major challenge is the ageing infrastructure, also called legacy IT.

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits.

To compete for deposits, US savings institutions offer many different types of plans:[32]

  • 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.
  • Money market accounts – 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.
  • 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 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 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.[33]

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).

One source of deposits for banks is brokers who deposit large sums of money on behalf of investors through trust corporations.

Custodial accounts are accounts in which assets are held for a third party.

Globalization in the banking industry


In modern time there has been huge reductions to the barriers of global competition in the banking industry.

See also


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