A bank is a commercial or state institution that provides financial
services , including issuing money in various forms, receiving deposits of money,
lending money and processing transactions and the creating of credit. A commercial bank
accepts deposits from customers and in turn makes loans, even in excess of the deposits; a process
known as fractional-reserve banking. Some banks (called Banks of issue) issue
banknotes as legal tender. Many banks offer ancillary financial services to make additional profit; for example, most banks also rent safe deposit boxes in their branches.
Currently in most jurisdictions commercial banks are regulated and require permission to operate. Operational authority is
granted by bank regulatory authorities which provides rights to conduct the most fundamental banking services such as accepting
deposits and making loans. A commercial bank is usually defined as an institution that both accepts deposits and makes loans;
there are also financial institutions that provide selected banking services without meeting the legal definition of a bank.
Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans
to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with
interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Commercial
lending today is a very intense activity, with banks carefully analysing the financial condition of their business clients to
determine the level of risk in each loan transaction. Banking services have expanded to include services directed at individuals,
and risk in these much smaller transactions are pooled.
A bank generates a profit 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 cyclic and dependent on
the needs and strengths of loan customers. In recent history, investors have demanded a more stable revenue stream and banks have
therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on array of deposit
activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc.).
However, lending activities still provide the bulk of a commercial bank's income.
The name bank derives from the Italian word banco "desk/bench", used
during the Renaissance by Florentines bankers, who used to
make their transactions above a desk covered by a green tablecloth.[citation needed] However, there are traces of banking activity even in ancient times.
Services typically offered by banks
Although the basic type of services offered by a bank depends upon the type of bank and the country, services provided usually
include:
Financial transactions can be performed through many different channels:
- A branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array
of face to face service to its customers
- ATM is a computerised telecommunications device that provides a financial
institution's customers a method of financial transactions in a public space without the need for a human clerk or bank
teller
- Mail is part of the postal system which itself is a system wherein written documents typically
enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world
- Telephone banking is a service provided by a financial institution which allows
its customers to perform transactions over the telephone
- Online banking is a term used for performing transactions, payments etc. over the
Internet through a bank, credit union or building society's secure website
Types of banks
Banks' activities can be divided into retail banking, dealing directly with
individuals and small businesses; business banking, providing services to mid-market business;
corporate banking, directed at large business entities; private banking, providing
wealth management services to High Net Worth Individuals and families; 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-profits.
Central banks are non-commercial bodies or government agencies often charged with
controlling interest rates and money supply across the
whole economy. They generally provide liquidity to the banking system and act as Lender
of last resort in event of a crisis.
Types of retail banks
- Commercial bank: the term used for a normal bank to distinguish it from an
investment bank. After the Great Depression, the U.S. Congress
required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since
the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a
bank that mostly deals with deposits and loans from corporations or large businesses.
- Community Banks: locally operated financial institutions that empower employees to make local
decisions to serve their customers and the partners
- Community development banks: regulated banks that provide financial
services and credit to underserved markets or populations.
- Postal savings banks: savings banks associated with national postal systems.
- Private banks: manage the assets of high net worth individuals.
- Offshore banks: banks located in jurisdictions with low taxation and regulation. Many
offshore banks are essentially private banks.
- Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even
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, while 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 decentralised distribution network, providing local and regional outreach
and by their socially responsible approach to business and society.
- Building societies and Landesbanks: conduct retail
banking.
- Ethical banks: banks that prioritize the transparency of all operations and make
only what they consider to be socially-responsible investments.
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 markets
activities such as mergers and acquisitions.
- Merchant banks were traditionally banks which engaged in trade financing. 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 banks, more commonly known as a financial
services company, engage in several of these activities. For example, First Bank (a
very large bank) is involved in commercial and retail lending, and its subsidiaries in tax-havens offer offshore banking services
to customers in other countries. Other large financial institutions are similarly diversified and engage in multiple activities.
In Europe and Asia, big banks are very diversified groups that, among other services, also distribute insurance, hence the term
bancassurance is the term used to describe the sale of insurance products in a bank. The
word is a combination of "banque or bank" and "assurance" signifying that both banking and insurance are provided by the same
corporate entity.
Other types of banks
Islamic banking
- Islamic banks adhere to the concepts of Islamic law.
Islamic banking revolves around several well established concepts which are based on Islamic canons. Since the concept of
interest is forbidden in Islam, all banking activities must avoid interest. Instead of interest, the bank earns profit (mark-up)
and fees on financing facilities that it extends to the customers. Also, deposit makers earn a share of the bank’s profit as
opposed to a predetermined interest.[citation needed]
Banks in the economy
Role in the money supply
A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or issuing financial instruments in the money market or a
capital market. The bank then lends out most of these funds to borrowers.
However, it would not be prudent for a bank to lend out all of its balance sheet. It must keep a certain proportion of its
funds in reserve so that it can repay depositors who withdraw their deposits. Bank
reserves are typically kept in the form of a deposit with a central bank. This
behaviour is called fractional-reserve banking and it is a central issue of
monetary policy. Note that under Basel I (and the new
round of Basel II), banks no longer keep deposits with central banks, but must maintain defined
capital ratios.[citation needed]
Size of global banking industry
Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach a record $60.5 trillion. This follows a 19.3% increase
in the previous year. EU banks held the largest share, 50% at the end of 2005, up from 38% a decade earlier. The growth in
Europe’s share was mostly at the expense of Japanese banks whose share more than halved during this period from 33% to 13%. The
share of US banks also rose, from 10% to 14%. Most of the remainder was from other Asian and European countries.[citation needed]
The US had by far the most banks (7,540 at end-2005) and branches (75,000) in the world. The large number of banks in the US
is an indicator of its geography and regulatory structure, resulting in a large number of small to medium sized institutions in
its banking system. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy had more than 30,000 branches
each—more than double the 15,000 branches in the UK.[1]
Bank crisis
Banks are susceptible to many forms of risk which have triggered occasional systemic crises. Risks include liquidity risk (the
risk that many depositors will request withdrawals beyond available funds), credit risk (the risk that those who owe money to the
bank will not repay), and interest rate risk (the risk 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), among others.
Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a
whole. Prominent examples include the U.S. Savings and Loan crisis in 1980s and
early 1990s, the Japanese banking crisis during the 1990s, the bank run that occurred during
the Great Depression, and the recent liquidation by the central
Bank of Nigeria, where about 25 banks were liquidated.[citation needed]
Challenges within the banking industry
The banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits
have the 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 thrifts. State non-member banks are examined by the
state agencies as well as the FDIC. National banks have one primary regulator—the OCC.
Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere.
The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal interagency body empowered
to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the
FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly
changing.
In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS
and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been
cut. The remaining regulators face an increased burden with increased workload and more banks per regulator. While banks struggle
to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate
their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent
with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall
increase in bank failures across the United States.
The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their
interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry
trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent
economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on
consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to
generate a return to their shareholders.
The management of the banks’ asset portfolios also remains a challenge in today’s economic environment. Loans are a bank’s
primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an
issue for banks, declining asset quality has become a big problem for financial institutions. 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.
Regulation
-
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines,
aiming to uphold the soundness and integrity of the financial system. The combination of the instability of banks as well as
their important facilitating role in the economy led to banking being thoroughly regulated. The amount of capital a bank is
required to hold is a function of the amount and quality of its assets. Major banks are subject to the Basel Capital Accord promulgated by the Bank for
International Settlements. In addition, banks are usually required to purchase deposit
insurance to make sure smaller investors are not wiped out in the event of a bank failure.
Another reason banks are thoroughly regulated is that ultimately, no government can allow the banking system to fail. There is
almost always a lender of last resort—in the event of a liquidity crisis (where short term obligations exceed short term assets)
some element of government will step in to lend banks enough money to avoid bankruptcy.
Public perceptions of banks
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The neutrality of this section is disputed.
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In United States history, the National Bank was a major
political issue during the presidency of Andrew Jackson. Jackson fought against the bank
as a symbol of greed and profit-mongering, antithetical to the democratic ideals of
the United States.[citation needed]
Currently, many people consider that various banking policies take advantage of customers. In Canada, for example, the
New Democratic Party has called for the abolition of user fees for automated teller
transactions.[2] Other specific concerns are policies that
permit banks to hold deposited funds for several days, to apply withdrawals before deposits or from greatest to least, which is
most likely to cause the greatest overdraft, that allow backdating funds transfers and fee
assessments, and that authorize electronic funds transfers despite an overdraft.[citation needed] Some have expressed concern about a
systemic lack of bank accountability to the public in Canada. [1]
In response to the perceived greed and socially-irresponsible all-for-the-profit attitude of banks, in the last few decades a
new type of bank called ethical banks have emerged, which only make socially-responsible
investments (for instance, no investment in the arms industry) and are transparent in all its operations.
In the US, credit unions have also gained popularity as an alternative financial
resource for many consumers. Also, in various European countries, cooperative banks are
regularly gaining market share in retail banking.[citation needed]
Profitability
Large banks in the United States are some of the most profitable corporations, especially relative to the small
market shares they have. This amount is even higher if one counts the credit divisions of
companies like Ford, which are responsible for a large proportion of those companies' profits. [citation needed]
In the past 10 years in the United States, banks have taken many measures to ensure that they remain profitable while
responding to ever-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 been denied credit. Third, they have sought to increase the methods of payment processing available to the general
public and business clients. These products include debit cards, pre-paid cards, smart-cards, and credit cards. These products
make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with
under-developed financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to
purchase a home). However, with convenience there is also increased risk that consumers will mis-manage 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 cards.
The banking industry's main obstacles to increasing profits are existing regulatory burdens, new government regulation, and
increasing competition from non-traditional financial institutions.
Bank size information
Top ten banking groups in the world ranked by Shareholder equity ($m)
The 2006 bank atlas was compiled from commercial banks’ annual reports and financial statements for 2006 and 2005.[3] Figures in U.S.
dollars
Top ten banking groups in the world ranked by assets
Figures in U.S. dollars, and as at end-2004[4]
| Rank |
Country |
Company |
Assets (US $) |
| 1 |
 United Kingdom |
HSBC Holdings |
1,861 billion |
| 2 |
 Switzerland |
UBS |
1,533 billion |
| 3 |
 United States |
Citigroup |
1,484 billion |
| 4 |
 Japan |
Mizuho Financial Group |
1,296 billion |
| 5 |
 France |
Credit Agricole Group |
1,243 billion |
| 6 |
France |
BNP Paribas |
1,234 billion |
| 7 |
United States |
JPMorgan Chase & Co. |
1,157 billion |
| 8 |
 Germany |
Deutsche Bank |
1,144 billion |
| 9 |
United Kingdom |
Royal Bank of Scotland |
1,119 billion |
| 10 |
United States |
Bank of America |
1,110 billion |
Top ten banks in the world ranked by market capitalisation
Figures in U.S. dollars, and as at 26 July
2006[5]
As at 16 May 2007, following the January 2007 merger between Banca Intesa and Sanpaolo SPA, Italy's newly formed
Intesa Sanpaolo has a market cap of $104.7 billion.
Top ten bank holding companies in the world ranked by profit
Figures in U.S. dollars, and as 2006
Top ten banking groups in the world ranked by Tier 1 capital
Figures in U.S. dollars, and as at end-2005[6]
History of banking
Main article: History of banking
