Bank


A bank is a financial institution that accepts deposits from the public and creates a demand deposit while making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Banks play an important role in financial stability and the economy of a country, so most countries 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 have their roots in the ancient world. In the history of banking, a number of banking dynasties notably, the Medicis, the Pazzi, 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, while the oldest existing merchant bank is Berenberg Bank.

Activities

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, Wire transfers or telegraphic transfer, EFTPOS, and automated teller machines.
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. Nonbanks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.
Banks issue new money when they make loans. In contemporary banking systems, regulators set a minimum level of reserve funds that banks must hold against the deposit liabilities created by the funding of these loans, in order to ensure that the banks can meet demands for payment of such deposits. These reserves can be acquired through the acceptance of new deposits, sale of other assets, or borrowing from other banks including the central bank.

Range of activities

Activities undertaken by banks include personal banking, corporate banking, investment banking, private banking, transaction banking, insurance, consumer finance, trade finance and other related.

Channels

Banks offer many different channels to access their banking and other services:
Banks generate revenue in a variety of different ways including interest, transaction fees and financial advice. Traditionally, the most significant method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.
This difference is referred to as the spread between 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.
  • 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 cards, prepaid cards, smart cards, and credit cards. They make it easier for consumers to conveniently make transactions and smooth their consumption over time.
This helps in making a profit and facilitates economic development as a whole.
Recently, as banks have been faced with pressure from fintechs, new and additional business models have been suggested such as freemium, monetization of data, white-labeling of banking and payment applications, or the cross-selling of complementary products.

Products

Retail

Banking as an archaic activity is thought to have begun as early as the end of the 4th millennium BCE, to the 3rd millennia BCE.

Medieval

In Europe, the first recorded instances of private banks were run by the Knights Templar. The Knights provided safe passage for pilgrims traveling to Jerusalem. To avoid being targeted by robbers because of the large sum of money required for the pilgrimage, pilgrims would exchange money in Templar strongholds for a receipt. They could then withdraw the money along the route at other Templar strongholds to purchase necessities. The organization would provide these services from the 12th century until their disbandment in the early 14th century. The present era of banking can be traced to wealthy medieval Renaissance Italian city-states, whose elite families such as the Bardi and Peruzzi dominated banking in 14th-century Florence before 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 Consell de Cent founded the earliest-known state deposit bank, the Taula de canvi de Barcelona, in 1401 at Barcelona. This was followed by The Bank of Saint George, created in 1407 at Genoa, Italy.

Early modern

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 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. By the 19th century, ordinary deposits of money in banks had become a mere loan, or mutuum, and the bank restored an equivalent sum whenever it was demanded
Money, when paid into a bank, ceases altogether to be the money of the principal ; 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 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.