I walk by a bank that is a 5-minute walk from my townhouse. When I moved to Addison in 2006, it was a Washington Mutual bank. I opened an account there because it was convenient. The savings bank holding company was bought by JPMorgan Chase & Co. in 2009. I don’t actually physically enter the bank for many things any more except to withdraw cash or get change for big bills. I usually do cash withdrawals at the drive-through except when it is a large amount. My social security check is automatically deposited to my bank. My IRS refunds and stimulus checks were automatically deposited to my bank. Other checks I receive in the mail I deposit with the app on my phone by simply taking a photo of the check. It seems like magic every time I do it. Banks are practical institutions that protect your money. Let’s learn more about them.
According to Wikipedia, a bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized a system known as fractional reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords.
Banking in its modern sense evolved in the fourteenth century in the prosperous cities of Renaissance Italy but in many ways functioned as a continuation of ideas and concepts of credit and lending that had their roots in the ancient world. In the history of banking, a number of banking dynasties — notably, the Medicis, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds — have played a central role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena — founded in 1472, while the oldest existing merchant bank is Berenberg Bank, founded in 1590.
History
The concept of banking may have begun in ancient Assyria and Babylonia with merchants offering loans of grain as collateral within a barter system. Lenders in ancient Greece and during the Roman Empire added two important innovations: they accepted deposits and changed money. Archaeology from this period in ancient China and India also shows evidence of money lending.
The present era of banking can be traced to medieval and early Renaissance Italy, to the rich cities in the center and north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th-century Florence, establishing branches in many other parts of Europe. Giovanni di Bicci de' Medici set up one of the most famous Italian banks, the Medici Bank, in 1397. The Republic of Genoa founded the earliest-known state deposit bank, Banco di San Giorgio or Bank of St. George in 1407 at Genoa, Italy.
Fractional reserve banking and the issue of banknotes emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London, who possessed private vaults, and who charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only the original depositor could collect the stored goods.
Gradually the goldsmiths began to lend the money out on behalf of the depositor, and promissory notes(which evolved into banknotes were issued for money deposited as a loan to the goldsmith. Thus by the 19th century we find "[i]n ordinary cases of deposits of money with banking corporations or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to restore not the same money, but an equivalent sum, whenever it is demanded" and "[m]oney, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it." The goldsmith paid interest on deposits. Since the promissory notes were payable on demand, and the advances or loans to the goldsmith's customers were repayable over a longer time-period, this was an early form of fractional reserve banking. The promissory notes developed into an assignable instrument which could circulate as a safe and convenient form of money backed by the goldsmith's promise to pay, allowing goldsmiths to advance loans with little risk of default. Thus the goldsmiths of London became the forerunners of banking by creating new money based on credit.
The Bank of England originated the permanent issue of banknotes in 1695. The Royal Bank of Scotland established the first overdraft facility in 1728. By the beginning of the 19th century, Lubbock's Bank had established a bankers' clearing house in London to allow multiple banks to clear transactions. The Rothschilds pioneered international finance on a large scale, financing the purchase of shares in the Suez canal for the British government in 1875.
Etymology
The word bank was taken into Middle English from Middle French banque, from Old Italian banca, meaning "table," from Old High German banc, bank "bench, counter." Benches were used as makeshift desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.
Definition
The definition of a bank varies from country to country. See the relevant country pages for more information.
Under English common law, a banker is defined as a person who carries on the business of banking by conducting current accounts for their customers, paying checks drawn on them and also collecting checks for their 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 structured or regulated.
The business of banking is in many common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions, there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation and not necessarily in general. In particular, most of the definitions are from legislation that has the purpose of regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions:
· "Banking business" means the business of receiving money on current or deposit account, paying and collecting checks 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:
1. 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.
2. Paying or collecting checks drawn by or paid in by customers.
Since the advent of EFTPOS or Electronic Funds Transfer at Point Of Sale, direct credit, direct debit and internet banking, the check has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the check-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 business
Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers in the bank and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as automated clearing house or ACH, wire transfers or telegraphic transfer, EFTPOS, and automated teller
machines or ATMs.
Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans and by investing in marketable debt securities and other forms of money lending.
Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.
Banks can create new money when they make a loan. New loans throughout the banking system generate new deposits elsewhere in the system. The money supply is usually increased by the act of lending and reduced when loans are repaid faster than new ones are generated. In the United Kingdom between 1997 and 2007, there was an increase in the money supply, largely caused by much more bank lending, which served to push up property prices and increase private debt. The amount of money in the economy as measured by M4 in the UK went from £750 billion to £1700 billion between 1997 and 2007, much of the increase caused by bank lending. If all the banks increase their lending together, then they can expect new deposits to return to them and the amount of money in the economy will increase. Excessive or risky lending can cause borrowers to default. The banks then become more cautious, so there is less lending and therefore less money, so that the economy can go from boom to bust as happened in the UK and many other Western economies after 2007.
Range of activities
Activities undertaken by banks include personal banking, corporate banking, investment banking, private banking, transaction banking, insurance, consumer finance and trade finance.
Channels
Banks offer many different channels to access their banking and other services:
· Branch, in-person banking in a retail location.
· Automated teller machine banking adjacent to or remote from the bank.
Bank by mail: Most banks accept check deposits via mail and use mail to communicate to their customers.
· Online banking over the internet to perform multiple types of transactions.
· Mobile banking is using one's mobile phone to conduct banking transactions.
The van in the photo visits the town of Berkeley for two hours each Thursday following the closure of the town's NatWest branch in 2015.
· Telephone banking allows customers to conduct transactions over the telephone with an automated attendant or when requested, with a telephone operator.
· Video banking performs banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose-built banking transaction machines — similar to an automated teller machine — or via a video conference enabled bank branch clarification.
· Relationship manager, mostly for private banking or business banking, who visits customers at their homes or businesses.
· Direct Selling Agent, who works for the bank based on a contract, whose main job is to increase the customer base for the bank.
Types of banks
· Commercial banks: the term used for a normal bank to distinguish it from an investment bank. After the Great
Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.
· Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.
· Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.
· Land development banks: The special banks providing long-term loans are called land development banks or LDB. The history of LDB is quite old. The first LDB was started at Jhang in Punjab in 1920. The main objective of the LDBs is to promote the development of land, agriculture and increase the agricultural production. The LDBs provide long-term finance to members directly through their branches.
· Credit unions or co-operative banks: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined area, members of a certain union or religious organizations and their immediate families.
· Postal savings banks: savings banks associated with national postal systems.
· Private banks: banks that manage the assets of high-net-worth individuals. Historically, a minimum of $1 million was required to open an account. However, over the last years, many private banks have lowered their entry hurdles to $350,000 for private investors. UBS Global Wealth Management ranks No. 1 in private banking.
· Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
· Savings banks: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralized distribution network, providing local and regional outreach — and by their socially responsible approach to business and society.
· Building societies and Landesbanks:
institutions that conduct retail banking.
· Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially responsible investments.
· A direct or internet-only bank is a banking operation without any physical bank branches. Transactions are usually accomplished using ATMs and electronic
transfers and direct deposits through an online interface.
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