Bank
A banker is a person who carries on the business of banking. The legal definition of the business of banking is:[citation needed]
- conducting current accounts for customers
- paying to the customer's order (e.g. the customer's cheques drawn on the bank), and
- collecting the cheques deposited to the customers's account, as the customer's agent and crediting the proceeds to the customer's current account.
Since the advent of EFTPOS (Electronic Funds Transfer and Point Of Sale), the cheque has lost its primacy in most banking systems as a payment instrument, leading legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.[citation needed]
However the commercial role of banks is wider than banking, and includes:
- issue of banknotes (promissory notes issued by a banker and payable to bearer on demand)
- processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means
- issuing and
- accepting money on term deposit
- lending money by way of overdraft, installment loan or otherwise
- providing documentary and standby letters of credit, guarantees, , securities underwriting commitments and other forms of off balance sheet exposures
- safekeeping of documents and other items in safe deposit boxes
- sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a 'financial supermarket'
Economic functions
The economic functions of banking include:
- credit intermediation -- banks borrow and lend back to back on their own account as middle men
- maturity transformation -- banks borrow on demand debt and short term debt, but provide long term loans
- settlement of payments -- banks handle payments between geographically remote parties, and can net off payment flows in opposite directions to reduce the cost of settling payment obligations.
Entry regulation
Currently in most jurisdictions commercial banks are regulated and require a bank licence 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, however money lending is generally not included in the definition.
Unlike most other regulated industries, the regulator is typically also a participant in the market, i.e. government owned bank (a central bank). Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case, e.g. in the UK the Financial Services Authority licences banks and some commercial banks issue their own banknotes in competition with the Bank of England.[citation needed]
Some types of entity may be partly or wholly exempt from bank licence requirements and are regulated by separate regulators, e.g. building societies and credit unions.
Politics and history
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.
Origin of the word
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.[1] However, there are traces of banking activity even in ancient times.
Banking channels
Banks offer many different channels to access their banking and other services:
- 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. Most banks now have more ATMs than branches, and ATMs are providing a wider range of services to a wider range of users. For example in Hong Kong, most ATMs enable anyone to deposit cash to any customer of the bank's account by feeding in the notes and entering the account number to be credited. Also, most ATMs enable card holders from other banks to get their account balance and withdraw cash, even if the card is issued by a foreign bank.
- 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. This can be used to deposit cheques and to send orders to the bank to pay money to third parties. Banks also normally use mail to deliver periodic account statements to customers.
- Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. This normally includes bill payments for bills from major billers (e.g. for electricity).
- 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; , 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 normally government owned banks, often charged with quasi-regulatory responsibilities, e.g. supervising commercial banks, or controlling the cash interest rate. 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.
- : 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.
- : 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 : 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
- , 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.
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.[2]
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.
Profitability
jesse loves men!!! 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.
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 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 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
Rank | Country | Company | Shareholder equity ($m) |
---|---|---|---|
1 | ![]() |
Citigroup | 112537 $mln |
2 | ![]() |
JPMorgan Chase | 107211 $mln |
3 | ![]() |
Bank of America | 101224 $mln |
4 | ![]() |
HSBC | 98226 $mln |
5 | ![]() |
Mitsubishi UFJ Financial Group | 83281 $mln |
6 | ![]() |
Credit Agricole Group | 65137 $mln |
7 | ![]() |
Royal Bank of Scotland Group | 64453 $mln |
8 | ![]() |
BNP Paribas | 56610 $mln |
9 | ![]() |
Santander Central Hispano | 53640 $mln |
10 | ![]() |
Mizuho Financial Group | 52243 $mln |
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 | ![]() |
HSBC Holdings | 1,861 billion |
2 | ![]() |
UBS | 1,533 billion |
3 | ![]() |
Citigroup | 2,400 billion |
4 | ![]() |
Mizuho Financial Group | 1,296 billion |
5 | ![]() |
Credit Agricole Group | 1,243 billion |
6 | ![]() |
BNP Paribas | 1,234 billion |
7 | ![]() |
JPMorgan Chase & Co. | 1,157 billion |
8 | ![]() |
Deutsche Bank | 1,144 billion |
9 | ![]() |
Royal Bank of Scotland | 1,119 billion |
10 | ![]() |
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]
Rank | Country | Company | Market Capitalisation (US $) |
---|---|---|---|
1 | ![]() |
Citigroup | 275 billion |
2 | ![]() |
ICBC | 250 billion |
3 | ![]() |
Bank of America | 230 billion |
4 | ![]() |
HSBC | 200 billion |
5 | ![]() |
JPMorgan Chase | 165 billion |
6 | ![]() |
Mitsubishi UFJ | 145 billion |
7 | ![]() |
Unicredit | 130 billion (2007) |
8 | ![]() |
Wells Fargo | 120 billion |
9 | ![]() |
UBS | 110 billion |
10 | ![]() |
Royal Bank of Scotland | 100 billion |
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[citation needed]
Rank | Country | Company | Profit (US $) |
---|---|---|---|
1 | ![]() |
Citigroup | 22.13 billion |
2 | ![]() |
Bank of America | 21.13 billion |
3 | ![]() |
HSBC | 22.086 billion |
4 | ![]() |
JP Morgan Chase | 14.44 billion |
5 | ![]() |
Royal Bank of Scotland Group | 12.1 billion |
6 | ![]() |
UBS | 9.79 billion |
7 | ![]() |
Goldman Sachs | 9.34 billion |
8 | ![]() |
Wells Fargo | 8.48 billion |
9 | ![]() |
Wachovia | 7.79 billion |
10 | ![]() |
Morgan Stanley | 7.45 billion |
Top ten banking groups in the world ranked by Tier 1 capital
Figures in U.S. dollars, and as at end-2005[6]
Rank | Country | Company | Tier 1 Capital (US $) |
---|---|---|---|
1 | ![]() |
HSBC | 79 billion |
2 | ![]() |
Citigroup | 75 billion |
3 | ![]() |
Bank of America | 73 billion |
4 | ![]() |
JP Morgan Chase | 72 billion |
5 | ![]() |
Mitsubishi UFJ Financial Group | 64 billion |
6 | ![]() |
Credit Agricole Group | 60 billion |
7 | ![]() |
Royal Bank of Scotland | 48 billion |
8 | ![]() |
Sumitomo Mitsui Financial Group | 40 billion |
9 | ![]() |
Mizuho Financial Group | 39 billion |
10 | ![]() |
Santander Central Hispano | 38 billion |
See also
Country specific information
- Australian banks
- Banking in Canada
- Banking in India
- Banking in Israel
- Banking in Italy
- Banking in Russia
- Banking in Switzerland
- Banks of the United Kingdom
- Banking in the United States
Types of institution
- Cooperative bank
- Credit union
- Industrial Loan Company
- Mutual savings bank
- Savings and loan association
- Savings bank
- Sparebank
- Ethical bank
- Islamic Banking
- Bankers' bank
- Mortgage bank
Terms and concepts
- Bank regulation
- Bank robbery
- Finance
- IBAN
- Internet banking
- Mobile Banking
- Money
- Overdraft
- Overdraft Protection
- Piggy Bank
- SWIFT
- Venture capital
- Wire transfer
- Pigmy Deposit Scheme
Related lists
- List of banks
- List of finance topics
- List of accounting topics
- List of economics topics
- Guide to E-payments
- List of stock exchanges
Further reading
- Tiwari, Rajnish and Buse, Stephan (2006): The German Banking Sector: Competition, Consolidation and ContentmentPDF (43.5 KiB), Hamburg University of Technology (TU Hamburg-Harburg)
- Brunner, A., Decressin, J. / Hardy, D. / Kudela, B. (2004): Germany’s Three-Pillar Banking System – Cross-Country Perspectives in Europe, Occasional Paper, International Monetary Fund, Washington DC 2004.
- Rothbard, Murray N. / Richardson & Snyder. 1983. The Mystery of Banking Full 177-page text in pdf formatPDF (2.67 MiB).
External links
Notes
- ^ de Albuquerque, Martim (1855). Notes and Queries. London: George Bell, 431.
- ^ http://www.ifsl.org.uk/uploads/CBS_Banking_2006.pdfPDF (208 KiB) chart 28, page 15
- ^ http://www.euromoney.com/page.asp?PageID=2050 Euromoney, Bank atlas: The world's biggest banks. List of the world's ten largest banks by Shareholder equity, 2006
- ^ http://www.economist.com/surveys/displaystory.cfm?story_id=6908408 The Economist, Thinking big, List of the world's ten largest banks by assets in 2004
- ^ http://www.economist.com/displayStory.cfm?story_id=7226067 The Economist, On Citi's tail, List of the world's biggest banks, by market capitalisation, as at 26 June 2006
- ^ http://www.economist.com/markets/indicators/displaystory.cfm?story_id=7141354 The Economist, The world's biggest banks, List of the world's ten largest banks by Tier 1 capital at the end of 2005