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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. 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, used during the
Renaissance by Florentines bankers, who used to make their transactions above a
desk covered by a green tablecloth.
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:
Taking deposits from their customers and issuing current (UK) or checking (US)
accounts and savings accounts to individuals and businesses
Extending loans to individuals and businesses
Cashing cheques
Facilitating money transactions such as wire transfers and cashier's checks
Issuing credit cards, ATM cards, and debit cards
Storing valuables, particularly in a safe deposit box
Cashing and distributing bank rolls
Consumer & commercial financial advisory services
Pension & retirement planning
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; 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.
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.
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.
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.
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.
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
Main article: Bank 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
The examples and perspective in this article or section may not represent a
worldwide view of the subject.
Please improve this article or discuss the issue on the talk page.
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.
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. 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.
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.
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.
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
Contact Information
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