Bank
Encyclopedia
A bank is a financial institution
that serves as a financial intermediary
. The term "bank" may refer to one of several related types of entities:
Because of the important role depository institutions play in the financial system, the banking industry is generally regulated
with government restrictions on financial activities by banks varied over time and by location. Current global bank capital requirements are referred to as Basel II
. In some countries, such as Germany
, banks have historically owned major stakes in industrial companies, while in other countries, such as the United States
, banks have traditionally been prohibited from owning non-financial companies. In Japan
, banks are usually the nexus of a cross-share holding entity known as the "keiretsu
". In Iceland
, banks followed international standards of regulation prior to the recent global financial crisis that began in 2007.
The oldest bank still in existence is Monte dei Paschi di Siena
, headquartered in Siena
, Italy
, which has been operating continuously since 1472.
A Bank's main source of income is interest paid on loans. A bank pays out at a lower interest rate on deposits and receives a higher interest rate on loans. The difference between these rates represents the bank's net income. Banks also generate non-interest income from service fees for Retail and Business banking products, transactional fees, or other non-traditional services such as Trust and Wealth Management consulting, Insurance, Cash Management services, Mortgage loan closing costs and points.
Italy
, to the rich cities in the north like Florence
, Venice
and Genoa
. The Bardi
and Peruzzi
families dominated banking in 14th century Florence, establishing branches in many other parts of Europe
. Perhaps the most famous Italian bank was the Medici
bank, set up by Giovanni Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio
(Bank of St. George), was founded in 1407 at Genoa
, Italy
.
from Middle French
banque, from Old Italian
banca, from Old High German
banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance
by Florentine
bankers, who used to make their transactions atop desks covered by green tablecloths.
One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon
, c. 350–325 BC, presented in the British Museum
in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek
the word Trapeza (Τράπεζα) means both a table and a bank.
Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:
In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including checks, 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 checks does not depend on how the bank is organized 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 purposes of entry 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:
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 checks.
drawn by customers on the bank, and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearning House (ACH), Wire Transfers or telegraphic transfer
, EFTPOS, and automated teller machine
(ATM).
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 loan
s, and by investing in marketable debt securities and other forms of money lending.
Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account.
Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institution
s in many cases provide an adequate substitute to banks for lending savings too.
on the capital it lends out to customers. The bank profits from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.
This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance.
In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. 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. These products include debit card
s, prepaid cards, smart card
s, and credit card
s. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home).
However, with 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 payments and fees charged to consumers and transaction fees to companies that accept the credit- debit - cards.
This helps in making profit and facilitates economic development as a whole.
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. Some of the main risks faced by banks include:
The capital requirement
is a bank regulation
, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see risk-weighted asset
).
(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 materialized 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 Japan
ese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s.
The United States has the most banks in the world in terms of institutions (7,085 at the end of 2008) and possibly branches (82,000). 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 Nov 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 the UK.
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:
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:
, 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 individual
s and families; and 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 organization
s.
(FDIC) as a regulator; however, for examinations, 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 thrift
s. State non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulator—the OCC. Qualified Intermediaries & Exchange Accommodators are regulated by MAIC.
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, MAIC 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. 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 recognized. 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 aging ownership groups. Across the country, many banks’ management teams and board of directors are aging. 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, check 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 MAIC trust & Securities Clearing services trading and become big players in such activities.
had to dollars moving from savings accounts and into direct market instruments such as U.S. 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:
Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP
and MAIC there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. This means you credit a credit account to increase its balance, and you debit a credit account to decrease its balance.
This also means you credit your savings account every time you deposit money into it (and the account is normally in credit), while you debit your credit card account every time you spend money from it (and the account is normally in debit).
However, if you read your bank statement, it will say the opposite—that you credit your account when you deposit money, and you debit it when you withdraw funds. If you have cash in your account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or deficit) balance.
Where bank transactions, balances, credits and debits are discussed below, they are done so from the viewpoint of the account holder—which is traditionally what most people are used to seeing.
of the 1980s. MAIC 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.
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 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. A Study of Bank Nationality and reach
Terms and concepts:
Crime:
Lists:
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
that serves as a financial intermediary
Financial intermediary
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents...
. The term "bank" may refer to one of several related types of entities:
- A central bankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
circulates money on behalf of a government and acts as its monetary authority by implementing monetary policyMonetary policyMonetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
, which regulates the money supplyMoney supplyIn economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
. - A commercial bankCommercial bankAfter the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
accepts depositsDeposit accountA deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
and pools those funds to provide creditCredit (finance)Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
, either directly by lendingLoanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
, or indirectly by investingInvestmentInvestment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
through the capital marketCapital marketA capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
s. Within the global financial marketFinancial marketIn economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
s, these institutions connect market participants with capital deficits (borrowers) to market participants with capital surpluses (investors and lenders) by transferring funds from those parties who have surplus funds to invest (financial assets) to those parties who borrow funds to invest in real assets. - A savings bankSavings bankA savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.In Europe, savings banks originated in the 19th or sometimes even the 18th century. Their original objective was to provide easily accessible savings products to...
(known as a "building societyBuilding societyA building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...
" in the United KingdomUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
) is similar to a savings and loan associationSavings and loan associationA savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
(S&L). They can either be stockholder owned or mutually owned, in which case they are permitted to only borrow from members of the financial cooperativeCooperativeA cooperative is a business organization owned and operated by a group of individuals for their mutual benefit...
. The asset structure of savings banks and savings and loan associations is similar, with residential mortgage loans providing the principal assets of the institution's portfolio.
Because of the important role depository institutions play in the financial system, the banking industry is generally regulated
Bank regulation
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things...
with government restrictions on financial activities by banks varied over time and by location. Current global bank capital requirements are referred to as Basel II
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
. In some countries, such as Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, banks have historically owned major stakes in industrial companies, while in other countries, such as the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, banks have traditionally been prohibited from owning non-financial companies. In Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, banks are usually the nexus of a cross-share holding entity known as the "keiretsu
Keiretsu
A is a set of companies with interlocking business relationships and shareholdings. It is a type of business group. The keiretsu has maintained dominance over the Japanese economy for the greater half of the twentieth century....
". In Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
, banks followed international standards of regulation prior to the recent global financial crisis that began in 2007.
The oldest bank still in existence is Monte dei Paschi di Siena
Monte dei Paschi di Siena
Banca Monte dei Paschi di Siena S.p.A. is the oldest surviving bank in the world. Founded in 1472 by the Magistrate of the city state of Siena, Italy, as a mount of piety, it has been operating ever since. Today it consists of approximately 3,000 branches, 33,000 employees and 4.5 million...
, headquartered in Siena
Siena
Siena is a city in Tuscany, Italy. It is the capital of the province of Siena.The historic centre of Siena has been declared by UNESCO a World Heritage Site. It is one of the nation's most visited tourist attractions, with over 163,000 international arrivals in 2008...
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, which has been operating continuously since 1472.
A Bank's main source of income is interest paid on loans. A bank pays out at a lower interest rate on deposits and receives a higher interest rate on loans. The difference between these rates represents the bank's net income. Banks also generate non-interest income from service fees for Retail and Business banking products, transactional fees, or other non-traditional services such as Trust and Wealth Management consulting, Insurance, Cash Management services, Mortgage loan closing costs and points.
History
Banking in the modern sense of the word can be traced to medieval and early RenaissanceRenaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...
Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, to the rich cities in the north like Florence
Florence
Florence is the capital city of the Italian region of Tuscany and of the province of Florence. It is the most populous city in Tuscany, with approximately 370,000 inhabitants, expanding to over 1.5 million in the metropolitan area....
, Venice
Venice
Venice is a city in northern Italy which is renowned for the beauty of its setting, its architecture and its artworks. It is the capital of the Veneto region...
and Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
. The Bardi
Bardi family
The Bardi family was an influential Florentine family that started the powerful banking company, the Compagnia dei Bardi.Along with the Peruzzi family, the Bardis lent Edward III of England 400,000 Gold Florins, which he never repaid....
and Peruzzi
Peruzzi
The Peruzzi were bankers of Florence, among the leading families of the city in the 14th century, before the rise to prominence of the Medici. Their modest antecedents stretched back to the mid 11th century, according to the family's genealogist Luigi Passerini, but a restructuring of the Peruzzii...
families dominated banking in 14th century Florence, establishing branches in many other parts of Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
. Perhaps the most famous Italian bank was the Medici
Medici
The House of Medici or Famiglia de' Medici was a political dynasty, banking family and later royal house that first began to gather prominence under Cosimo de' Medici in the Republic of Florence during the late 14th century. The family originated in the Mugello region of the Tuscan countryside,...
bank, set up by Giovanni Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio
Bank of Saint George (Genoa)
The Bank or Company of Saint George was a financial institution of the Republic of Genoa. Founded in 1407, it was one of the oldest chartered banks in Europe, if not the world...
(Bank of St. George), was founded in 1407 at Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
, Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
.
Origin of the word
The word bank was borrowed in Middle EnglishMiddle English
Middle English is the stage in the history of the English language during the High and Late Middle Ages, or roughly during the four centuries between the late 11th and the late 15th century....
from Middle French
Middle French
Middle French is a historical division of the French language that covers the period from 1340 to 1611. It is a period of transition during which:...
banque, from Old Italian
Italian language
Italian is a Romance language spoken mainly in Europe: Italy, Switzerland, San Marino, Vatican City, by minorities in Malta, Monaco, Croatia, Slovenia, France, Libya, Eritrea, and Somalia, and by immigrant communities in the Americas and Australia...
banca, from Old High German
Old High German
The term Old High German refers to the earliest stage of the German language and it conventionally covers the period from around 500 to 1050. Coherent written texts do not appear until the second half of the 8th century, and some treat the period before 750 as 'prehistoric' and date the start of...
banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance
Renaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...
by Florentine
Florence
Florence is the capital city of the Italian region of Tuscany and of the province of Florence. It is the most populous city in Tuscany, with approximately 370,000 inhabitants, expanding to over 1.5 million in the metropolitan area....
bankers, who used to make their transactions atop desks covered by green tablecloths.
One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon
Trabzon
Trabzon is a city on the Black Sea coast of north-eastern Turkey and the capital of Trabzon Province. Trabzon, located on the historical Silk Road, became a melting pot of religions, languages and culture for centuries and a trade gateway to Iran in the southeast and the Caucasus to the northeast...
, c. 350–325 BC, presented in the British Museum
British Museum
The British Museum is a museum of human history and culture in London. Its collections, which number more than seven million objects, are amongst the largest and most comprehensive in the world and originate from all continents, illustrating and documenting the story of human culture from its...
in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek
Modern Greek
Modern Greek refers to the varieties of the Greek language spoken in the modern era. The beginning of the "modern" period of the language is often symbolically assigned to the fall of the Byzantine Empire in 1453, even though that date marks no clear linguistic boundary and many characteristic...
the word Trapeza (Τράπεζα) means both a table and a bank.
Definition
The definition of a bank varies from country to country. See the relevant country page (below) 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 checks drawn on him, and
- collecting checks for his customers.
In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including checks, 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 checks does not depend on how the bank is organized 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 purposes of entry 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:
- 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 period;
- paying or collecting checks drawn by or paid in by customers
Since the advent of EFTPOS
EFTPOS
EFTPOS is the general term used for debit card based systems used for processing transactions through terminals at points of sale. In Australia and New Zealand it is also the brand name of the specific system used for such payments...
(Electronic Funds Transfer at Point Of Sale), direct credit, direct debit
Direct debit
A direct debit or direct withdrawal is an instruction that a bank account holder gives to his or her bank to collect an amount directly from another account. It is similar to a direct deposit but initiated by the beneficiary...
and internet banking
Online banking
Online banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
, 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 checks.
Standard activities
Banks act as payment agents by conducting checking or current accounts for customers, paying checkCheck
Check may refer to* A small crack in the glass, also known as a check, in the glass container industry* Cheque , an order for transfer of money* Check box, a type of widget in computing...
drawn by customers on the bank, and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearning House (ACH), Wire Transfers or telegraphic transfer
Telegraphic transfer
Telegraphic Transfer or Telex Transfer , often abbreviated to TT, is an electronic means of transferring funds overseas. A transfer charge is collected while sending money...
, EFTPOS, and automated teller machine
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
(ATM).
Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
. Banks lend money by making advances to customers on current accounts, by making installment loan
Installment loan
An installment loan is a loan that is repaid over time with a set number of scheduled payments. The term of loan may be as little as a few months and as long as 30 years...
s, and by investing in marketable debt securities and other forms of money lending.
Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account.
Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institution
Non-bank financial institution
A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market...
s in many cases provide an adequate substitute to banks for lending savings too.
Channels
Banks offer many different channels to access their banking and other services:- Automated Teller MachinesAutomated teller machineAn automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
- A branchBranch (banking)A branch, banking center or financial center is a retail location where a bank, credit union, or other financial institution offers a wide array of face-to-face and automated services to its customers....
is a retail location - Call center
- Mail: most banks accept check deposits via mail and use mail to communicate to their customers, e.g. by sending out statements
- Mobile bankingMobile BankingMobile banking is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant . The earliest mobile banking services were offered over SMS...
is a method of using one's mobile phone to conduct banking transactions - Online bankingOnline bankingOnline banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
is a term used for performing transactions, payments etc. over the Internet - Relationship ManagersCustomer relationship managementCustomer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
, mostly for private banking or business banking, often visiting customers at their homes or businesses - Telephone bankingTelephone bankingTelephone banking is a service provided by a financial institution, which allows its customers to perform transactions over the telephone.Most telephone banking services use an automated phone answering system with phone keypad response or voice recognition capability...
is a service which allows its customers to perform transactions over the telephone either automatically or by speaking to a human. - Video bankingVideo bankingVideo banking is a term used for performing banking transactions or professional banking consultations via a remote video connection. Video banking can be performed via purpose built banking transaction machines , or via a videoconference enabled bank branch.- Types of Video Banking :Today, video...
is a term used for performing 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
Business model
A bank can generate revenue in a variety of different ways including interest, transaction fees and financial advice. The main method is via charging interestInterest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
on the capital it lends out to customers. The bank profits from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.
This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance.
In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. First, this includes the Gramm-Leach-Bliley Act
Gramm-Leach-Bliley Act
The Gramm–Leach–Bliley Act , also known as the Financial Services Modernization Act of 1999, is an act of the 106th United States Congress...
, 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
Risk-based pricing
Risk-based pricing is a methodology adopted by many lenders in the mortgage and financial services industries. It has been in use for many years as lenders try to measure loan risk in terms of interest rates and other fees...
from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise be denied credit.
Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s, prepaid cards, smart card
Smart card
A smart card, chip card, or integrated circuit card , is any pocket-sized card with embedded integrated circuits. A smart card or microprocessor cards contain volatile memory and microprocessor components. The card is made of plastic, generally polyvinyl chloride, but sometimes acrylonitrile...
s, and credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
s. They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home).
However, with 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 payments and fees charged to consumers and transaction fees to companies that accept the credit- debit - cards.
This helps in making profit and facilitates economic development as a whole.
Products
Retail Banking
- Checking Account
- Savings AccountSavings accountSavings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...
- Money Market Account
- Certificate of DepositCertificate of depositA certificate of Deposit is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions....
(CD's) - Individual Retirement Accounts (IRA's)
- Credit cardCredit cardA credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
- Debit cardDebit cardA debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
- MortgageMortgageA mortgage is a security interest in real property held by a lender as a security for a debt, usually a loan of money. A mortgage in itself is not a debt, it is the lender's security for a debt...
s - Home Equity LoanHome equity loanA home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. These loans are useful to finance major expenses such as home repairs, medical bills or college education...
- Mutual Funds
- Personal Loan
Business (or Commercial) Banking
- Business loan
- Capital raising (EquityEquity (finance)In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
/ DebtDebtA debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
/ HybridsHybrid securityHybrid securities are a broad group of securities that combine the elements of the two broader groups of securities, debt and equity.Hybrid securities pay a predictable rate of return or dividend until a certain date, at which point the holder has a number of options including converting the...
) - Mezzanine finance
- Project financeProject financeProject finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors...
- Revolving creditRevolving creditRevolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Examples of revolving credits used by consumers include credit cards. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day...
- Risk managementRisk managementRisk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
(FXForeign exchange marketThe foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
, interest rates, commodities, derivatives) - Term loan
- Cash Management Services (Lock box, Remote Deposit Capture, Merchant Processing)
Risk and capital
Banks face a number of risksFinancial risk
Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...
in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital
Capital requirement
Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...
a bank is required to hold. Some of the main risks faced by banks include:
- Credit riskCredit riskCredit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
: risk of loss arising from a borrower who does not make payments as promised. - Liquidity riskLiquidity riskIn finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss .-Types of 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 riskMarket riskMarket risk is the 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. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices...
: 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 riskOperational riskAn operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates...
: risk arising from execution of a company's business functions. - Reputational riskReputational riskReputational risk, often called reputation risk, is a type of risk related to the trustworthiness of business. Damage to a firm's reputation can result in lost revenue or destruction of shareholder value, even if the company is not found guilty of a crime...
: a type of risk related to the trustworthiness of business.
The capital requirement
Capital requirement
Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...
is a bank regulation
Bank regulation
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things...
, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted (see risk-weighted asset
Risk-weighted asset
Risk-weighted asset is a bank's assets or off-balance sheet exposures, weighted according to risk. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio for a financial institution...
).
Economic functions
The economic functions of banks include:- Issue of money, in the form of banknotes and current accounts subject to checkCheckCheck may refer to* A small crack in the glass, also known as a check, in the glass container industry* Cheque , an order for transfer of money* Check box, a type of widget in computing...
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 check 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 economies on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.
- Credit intermediation – banks borrow and lend back-to-back on their own account as middle men.
- Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.
- Maturity transformationAsset liability mismatchIn finance, an asset–liability mismatch occurs when the financial terms of an institution's assets and liabilities do not correspond. Several types of mismatches are possible....
– 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 creationMoney creationIn economics, money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy by purchasing financial assets or lending money...
– whenever a bank gives out a loan in a fractional-reserve bankingFractional-reserve bankingFractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
system, a new sum of virtual money is created.
Bank crisis
Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity riskLiquidity risk
In finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss .-Types of Liquidity Risk:...
(where many depositors may request withdrawals in excess of available funds), credit risk
Credit risk
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
(the chance that those who owe money to the bank will not repay it), and interest rate risk
Interest rate risk
Interest rate risk is the risk borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa...
(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 materialized for a banking sector as a whole. Prominent examples include the bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
that occurred during the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, the U.S. Savings and Loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
in the 1980s and early 1990s, the Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
ese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s.
Size of global banking industry
Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record $96.4 trillion while profits declined by 85% to $115bn. 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 totaled $66.3bn in 2009, up 12% on the previous year.The United States has the most banks in the world in terms of institutions (7,085 at the end of 2008) and possibly branches (82,000). 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 Nov 2009, China's top 4 banks have in excess of 67,000 branches (ICBC
ICBC
ICBC may stand for:*Industrial and Commercial Bank of China , world's largest bank, based in Beijing*Inter-Collegiate Business Competition, An undergraduate business case competition hosted by Queen's University in Kingston, Ontario, Canada...
:18000+, BOC
BOC
BOC may refer toBanks:* Bank of Canada, Canada's central bank* Bank of China, a major state-owned bank in the People's Republic of China* Bank of Ceylon, a major government-owned commercial bank* Bank of Cyprus, a major cypriot financial institution...
:12000+, CCB
CCB
CCB may refer to:In Asian economics:* China Construction Bank, one of the 'big four' banks in the People's Republic of China* China Construction Bank , a licensed bank incorporated in Hong KongIn Australian schools:...
:13000+, ABC
Agricultural Bank of China
Agricultural Bank of China Limited , also known as AgBank, is one of the "Big Four" banks in the People's Republic of China. It was founded in 1951, and has its headquarters in Beijing...
: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 the UK.
Regulation
Currently in most jurisdictions commercial banks are regulated 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
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
licenses banks, and some commercial banks (such as the Bank of Scotland
Bank of Scotland
The Bank of Scotland plc is a commercial and clearing bank based in Edinburgh, Scotland. With a history dating to the 17th century, it is the second oldest surviving bank in what is now the United Kingdom, and is the only commercial institution created by the Parliament of Scotland to...
) issue their own banknotes in addition to those issued by the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
, 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 check drawn by the customer.
- The bank agrees to promptly collect the checks 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 lienLienIn law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
on checks 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 checks 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
Building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...
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 bankingRetail banking
Retail banking is banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.-Types of...
, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; private banking
Private banking
Private banking is banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers...
, providing wealth management services to high net worth individual
High net worth individual
A high-net-worth individual is a person with a high net worth. In the private banking business, these individuals typically are defined as having investable assets in excess of US$1 million. As explained below, the U.S...
s and families; and investment banking
Investment banking
An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit organization
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
s.
Types of retail banks
- Commercial bankCommercial bankAfter the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
: the term used for a normal bank to distinguish it from an investment bank. After the Great DepressionGreat DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital marketCapital marketA capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
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 banksCommunity banksA community bank is a depository institution that is typically locally owned and operated. Community banks tend to focus on the needs of the businesses and families where the bank holds branches and offices. Lending decisions are made by people who understand the local needs of families,...
: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. - Community development bankCommunity development bank- Community Development Banking in the United States :In the United States, community development banks are commercial banks that operate with a mission to generate economic development in low- to moderate-income geographical areas and serve residents of these communities...
s: regulated banks that provide financial services and credit to under-served markets or populations. - Credit unionCredit unionA credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
s: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined neighborhood, members of a certain labor union or religious organizations, and their immediate families. - Postal savings bankPostal savings systemMany nations' post offices operated or continue to operate postal savings systems to provide depositors who do not have access to banks a safe, convenient method to save money and to promote saving among the poor.-Great Britain:...
s: savings banks associated with national postal systems. - Private bankPrivate bankingPrivate banking is banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers...
s: 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 250,000 for private investors. - Offshore bankOffshore bankAn offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction that provides financial and legal advantages. These advantages typically include:...
s: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. - Savings bankSavings bankA savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.In Europe, savings banks originated in the 19th or sometimes even the 18th century. Their original objective was to provide easily accessible savings products to...
: 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 LandesbankLandesbankThe Landesbanken in Germany are a group of state owned banks of a type unique to Germany. They are regionally organised and their business is predominantly wholesale banking...
s: institutions that conduct retail banking. - Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.
- A Direct or Internet-Only bank is a banking operation without any physical bank branches, conceived and implemented wholly with networked computers.
Types of investment banks
- Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital marketCapital marketA capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
activities such as mergers and acquisitions. - Merchant bankMerchant bankA merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to....
s were traditionally banks which engaged in trade financeTrade financeTrade finance is related to international trade.While a seller can require the purchaser to prepay for goods shipped, the purchaser may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support...
. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike venture capital firms, they tend not to invest in new companies.
Both combined
- Universal bankUniversal bankA universal bank participates in many kinds of banking activities and is both a commercial bank and an investment bank.The concept is most relevant in the United Kingdom and the United States, where historically there was a distinction drawn between pure investment banks and commercial banks. In...
s, more commonly known as financial servicesFinancial servicesFinancial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
companies, engage in several of these activities. These big banks are very diversified groups that, among other services, also distribute insurance— hence the term bancassuranceBancassuranceThe Bank Insurance Model , also sometimes known as 'Bancassurance', is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.BIM allows the insurance company to...
, 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 bankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s are normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the cash interest rateInterest rateAn interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
. They generally provide liquidity to the banking system and act as the lender of last resortLender of last resortA lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...
in event of a crisis. - Islamic banks adhere to the concepts of Islamic lawShariaSharia law, is the moral code and religious law of Islam. Sharia is derived from two primary sources of Islamic law: the precepts set forth in the Quran, and the example set by the Islamic prophet Muhammad in the Sunnah. Fiqh jurisprudence interprets and extends the application of sharia to...
. 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 (markupMarkup (business)Markup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and...
) and fees on the financing facilities that it extends to customers.
Challenges within the banking industry
United States
In the United States, the banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits have the Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) as a regulator; however, for examinations, the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
(OCC) is the primary federal regulator for national banks; and the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
, or OTS, is the primary federal regulator for thrift
Thrift
Thrift may refer to:* A savings and loan association in the United States* Restrained or disciplined spending habits* Apache Thrift a remote procedure call framework developed at Facebook for "scalable cross-language services development"....
s. State non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulator—the OCC. Qualified Intermediaries & Exchange Accommodators are regulated by MAIC.
Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere.
The Federal Financial Institutions Examination Council
Federal Financial Institutions Examination Council
The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal...
(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, MAIC and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining regulators face an increased burden with increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States.
The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders.
The management of the banks’ asset portfolios also remains a challenge in today’s economic environment. Loans are a bank’s primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality
Asset quality
Asset quality an evaluation of an asset to measure the credit risk associated with it.-Description:Asset quality is related to the left-hand side of the bank balance sheet. Bank managers are concerned with the quality of their loans since that provides earnings for the bank...
has become a big problem for financial institutions. There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of “good times.” The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are recognized. 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 aging ownership groups. Across the country, many banks’ management teams and board of directors are aging. 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, check cashing services, credit card companies, etc.
As a reaction, banks have developed their activities in financial instruments
Financial instruments
A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....
, through financial market
Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
operations such as brokerage and MAIC trust & Securities Clearing services trading and become big players in such activities.
Competition for loanable funds
To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediationDisintermediation
In economics, disintermediation is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate , companies may now deal with every customer directly, for example via the Internet...
had to dollars moving from savings accounts and into direct market instruments such as U.S. 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:
- PassbookPassbookA passbook or bankbook is a paper book used to record bank transactions on a deposit account. Depending on the country or the financial institution, it can be of the dimensions of a chequebook or a passport....
or ordinary deposit accountDeposit accountA deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
s — permit any amount to be added to or withdrawn from the account at any time. - NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
- Money market 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. Savers agree to notify the institution a specified time before withdrawal.
- Individual retirement accountIndividual Retirement AccountAn individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s (IRAs) and Keogh plans — a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal. - Checking accounts — offered by some institutions under definite restrictions.
- All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons.
- Club accounts and other savings accountSavings accountSavings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...
s — designed to help people save regularly to meet certain goals.
Accounting for bank accounts
Gaap
In demonology, Gaap is a mighty Prince and Great President of Hell, commanding sixty-six legions of demons. He is, according to The Lesser Key of Solomon, the king and prince of the southern region of Hell and Earth, and according to the Pseudomonarchia Daemonum the king of the western region and...
and MAIC there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. This means you credit a credit account to increase its balance, and you debit a credit account to decrease its balance.
This also means you credit your savings account every time you deposit money into it (and the account is normally in credit), while you debit your credit card account every time you spend money from it (and the account is normally in debit).
However, if you read your bank statement, it will say the opposite—that you credit your account when you deposit money, and you debit it when you withdraw funds. If you have cash in your account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or deficit) balance.
Where bank transactions, balances, credits and debits are discussed below, they are done so from the viewpoint of the account holder—which is traditionally what most people are used to seeing.
Brokered deposits
One source of deposits for banks is brokers who deposit large sums of money on the behalf of investors through MAIC or other trust corporations. This money will generally go to the banks which offer the most favorable 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 crisisSavings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
of the 1980s. MAIC 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.
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 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. A Study of Bank Nationality and reach
Banking by country
- Banking in Australia
- Banking in AustriaBanking in AustriaThe Austrian National Bank , originally opened on January 2, 1923 but taken over by the German Reichsbank in 1938, was reestablished on July 3, 1945. The bank is a corporation with capital shares fixed by law at $150 million; 50% of the shares are, by law, owned by the government...
- Banking in BangladeshBanking in BangladeshThe Pakistani banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial...
- Banking in CanadaBanking in CanadaBanking in Canada is widely considered the most efficient and safest banking system in the world, ranking as the world's soundest banking system for the past three years according to reports by the World Economic Forum. Released at October 2010, Global Finance magazine put Royal Bank of Canada at...
- Banking in ChinaBanking in ChinaChina's banking system has undergone significant changes in the last two decades: banks are now functioning more like banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy...
- Banking in FranceBanking in FranceThe Banking industry in France has, as of 11 October 2008, an average leverage ratio of 28 to 1 and its short-term liabilities are equal to 60% of the French GDP or 128% of its national debt....
- Banking in GermanyBanking in GermanyBanking in Germany is a highly leveraged industry, as its average leverage ratio as of 11 October 2008 is 52 to 1 ; its short-term liabilities are equal to 60% of the German GDP or 167% of its national debt.-Market overview:Germany has universal banking.The private customer...
- Banking in GreeceBanking in GreeceBanking in Greece is an industry that has an average leverage ratio 16 to 1, and short-term liabilities equal to 35% of the Greek GDP or 38% of the Greek national debt, as of 11 October 2008.Central BankBank of Greece...
- Banking in Iran
- Banking in IndiaBanking in IndiaBanking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the...
- Banking in IsraelBanking in IsraelBanking in Israel has its roots in the Zionist movement in the beginning of the 20th century prior to the establishment of the State of Israel in 1948. The World Zionist Organization established the Anglo-Palestine Bank in 1903...
- Banking in ItalyBanking in ItalyBanking in Italy has, as of 11 October 2008, an average leverage ratio of 12 to 1, while the banks's short-term liabilities are equal to 86% of the Italian GDP or 43% of the Italian national debt....
- Banking in PakistanBanking in PakistanBanking in Pakistan first formally started in Pakistan during the period of British colonialisation in the South Asia. After independence from British Raj in 1947, and the emergence of Pakistan as a country in the globe, the scope of banking in Pakistan has been increasing and expanding continuously...
- Banking in RussiaBanking in RussiaThere are significant regulations for banking in Russia. Banks in the Russian Federation should meet mandatory Russian legislation requirements, and comply with numerous Bank of Russia instructions and regulations.-History:...
- Banking in SingaporeBanking in SingaporeBanking in Singapore is a service industry that has grown significantly in recent years. Total banking assets under management in Singapore rose from about $92 billion in 1998 to about $350 billion in 2004....
- Banking in SwitzerlandBanking in SwitzerlandAll banks in Switzerland are regulated by Swiss Financial Market Supervisory Authority , which derives its authority from a series of federal statutes...
- Banks of the United KingdomBanks of the United Kingdom-Independent British retail banks:The table shows the main independent British retail banks, in order of market capitalization. The list is quite short as British banking has been highly consolidated since the early 20th century. Unlike some other major economies, the UK does not have a major...
- Banking in the United StatesBanking in the United StatesBanking in the United States is regulated by both the federal and state governments.The U.S. banking sector's short-term liabilities as of October 11, 2008 are 15% of the gross domestic product of the United States or 43% of its national debt, and the average bank leverage ratio is 12 to...
See also
Types of institutions:- Bankers' bankBankers' bankA bankers' bank is a financial institution that provides financial services to community banks in the United States of America. Bankers' banks are owned by investor banks and may provide services only to community banks....
- Building SocietyBuilding societyA building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...
- Cooperative bank
- Credit unionCredit unionA credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members...
- Ethical bank
- Industrial loan companyIndustrial loan companyAn industrial loan company or industrial bank is a financial institution in the United States that lends money, and may be owned by non-financial institutions. Though such banks offer FDIC-insured deposits and are subject to FDIC and state regulator oversight, a debate exists to allow parent...
- Islamic bankingIslamic bankingIslamic banking is banking or banking activity that is consistent with the principles of Islamic law and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees for loans of money...
- Mortgage bankMortgage bankA Mortgage bank specializes in originating and/or servicing mortgage loans.A mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers...
- Mutual savings bankMutual savings bankA mutual savings bank is a financial institution chartered by a central or regional government, without capital stock, that is owned by its members who subscribe to a common fund. From this fund claims, loans, etc., are paid. Profits after deductions are shared between the members...
- Offshore banking
- Person-to-person lendingPerson-to-person lendingPerson-to-person lending is a certain breed of financial transaction which occurs directly between individuals or "peers" without the intermediation of...
- Savings and loan associationSavings and loan associationA savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
- Savings bankSavings bankA savings bank is a financial institution whose primary purpose is accepting savings deposits. It may also perform some other functions.In Europe, savings banks originated in the 19th or sometimes even the 18th century. Their original objective was to provide easily accessible savings products to...
- SparebankSparebankSparebank is a Norwegian savings bank without external owners. The Norwegian sparebanks are a separate type of juridical entity that differ from commercial banks. There are a total of 123 savings banks in Norway.- History :...
Terms and concepts:
- Bank regulationBank regulationBank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things...
- Bankers' bonusesBankers' bonusesBankers' bonuses are traditionally paid or awarded to some workers in the finance industry at the end of the bank's financial year. They are intended to reward employee behavior during that year that has increased the profits of the bank or some relevant part of its business , as shown by the annual...
- Call ReportCall ReportAll regulated financial institutions in the United States are required to file periodic financial and other information with their respective regulators and other parties. For banks in the U.S., one of the key reports required to be filed is the quarterly Report of Condition and Income, generally...
- ChequeChequeA cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
- Electronic funds transferElectronic funds transferElectronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
- Factoring (finance)Factoring (finance)Factoring is a financial transaction whereby a business job sells its accounts receivable to a third party at a discount...
- FinanceFinance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
- Fractional-reserve bankingFractional-reserve bankingFractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
- Hedge fundHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
- IBANIbanIBAN or Iban may refer to:People* Ibán Espadas , footballer* Iban Iriondo , bicycle racer* Iban Mayo , bicycle racer* Iban Mayoz , bicycle racer* Iban Nokan, anthropologist and ethnographer...
- Internet banking
- Investment bankingInvestment bankingAn investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities...
- Mobile bankingMobile BankingMobile banking is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant . The earliest mobile banking services were offered over SMS...
- MoneyMoneyMoney is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
- Money launderingMoney launderingMoney laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
- Narrow bankingNarrow bankingNarrow banking is a proposed type of bank called a narrow bank also called a safe bank. Ultimately, if adopted widely, this could lead to an entirely new banking system. Narrow banks can, by risk reduction measures designed into the narrow bank, significantly reduce potential bank runs and the need...
- OverdraftOverdraftAn overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft...
- Overdraft protection
- Piggy bankPiggy bankPiggy bank is the traditional name of a coin accumulation and storage receptacle; it is most often, but not exclusively, used by children. The piggy bank is known to collectors as a "still bank" as opposed to the "mechanical banks" popular in the early 20th century. These items are also often used...
- Pigmy Deposit SchemePigmy Deposit SchemePigmy Deposit Scheme is a monetary deposit scheme introduced by Syndicate Bank, India.Money can be deposited into an account on daily basis. The amount may be as small as Rupees Ten. It can be called a recurring deposit scheme, as the money is deposited almost daily...
- Private BankingPrivate bankingPrivate banking is banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers...
- Stock brokerStock brokerA stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...
- Substitute checkSubstitute checkA substitute check is a negotiable instrument used in the United States to represent the digital reproduction of an original paper check...
- SWIFTSwiftThe swifts are a family, Apodidae, of highly aerial birds. They are superficially similar to swallows, but are actually not closely related to passerine species at all; swifts are in the separate order Apodiformes, which they share with hummingbirds...
- Tax havenTax havenA tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
- Venture capitalVenture capitalVenture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
- Wealth ManagementWealth managementWealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services...
- Wire transferWire transferWire transfer or credit transfer is a method of electronic funds transfer from one person or institution to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office...
Crime:
- Bank fraudBank fraudBank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently representing to be a bank or financial institution. In many instances, bank fraud is a criminal offense...
- Bank robberyBank robberyBank robbery is the crime of stealing from a bank during opening hours. According to the Federal Bureau of Investigation's Uniform Crime Reporting Program, robbery is "the taking or attempting to take anything of value from the care, custody, or control of a person or persons by force or threat of...
- Cheque fraud
- Mortgage fraudMortgage fraudMortgage fraud is crime in which the intent is to materially misrepresent or omit information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained had the lender or borrower known the truth....
Lists:
- 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 stock exchanges
External links
- Guardian Datablog – World's Biggest Banks
- Banking, Banks, and Credit Unions from UCB Libraries GovPubs
- A Guide to the National Banking System (PDF). Office of the Comptroller of the CurrencyOffice of the Comptroller of the CurrencyThe Office of the Comptroller of the Currency is a US federal agency established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States...
(OCC), Washington, D.C.Washington, D.C.Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
Provides an overview of the national banking system of the USA, its regulation, and the OCC.