banks

A bank is a business that provides banking services for profit. Traditional banking services include receiving deposits of money, lending money and processing transactions. Some banks (called Banks of Issue) issue banknotes as legal tender. Many banks offer ancillary financial services to make additional profit; for example: selling insurance products, investment products or stock broking.

Currently in most jurisdictions the business of banking is regulated and banks require permission to trade. Authorisation to trade is granted by bank regulatory authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide banking services without meeting the legal definition of a bank (see banking institutions).

Banks have a long history, and have influenced economies and politics for centuries.

The word bank is derived from the Italian banca, which is derived from a Germanic language and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out-of-business bank, having its bench physically broken. Money lenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.

Traditionally, a bank generates profits from transaction fees on financial services and from the interest it charges for lending. In recent history, with historically low interest rates limiting banks' ability to earn money by lending deposited funds, much of a bank's income is provided by overdraft fees and riskier investments.

Services typically offered by banks

Although the 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 checking and savings accounts to individuals and businesses
• Extending loans to individuals and businesses
• Cashing cheques
• Facilitating money transactions such as wire transfers and cashiers checks
• Issuing credit cards, ATM cards, and debit cards
• Storing valuables, particularly in a safe deposit box

Financial transactions can be performed through several different channels:

• Branch
• ATM
• Mail
• Telephone
• Internet

Types of banks

Banks' activities can be characterised as retail banking, dealing directly with individuals and small businesses, 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-profit making.

In some jurisdictions retail and investment activities are, or have been, separated by law.

Central banks are non-commercial bodies or government agencies often charged with controlling interest rates and money supply across the whole economy. They act as Lender of last resort in event of a crisis.

Types of retail banks

• Commercial bank, is 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 markets 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 are locally operated financial institutions that empower employees to make local decisions to serve their customers.
• Community development bank are regulated banks that provide financial services and credit to underserved markets or populations.
• Postal savings banks are savings banks associated with national postal systems.
• Private banks manage the assets of high net worth individuals.
• Offshore banks are 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 both conduct retail banking.
• Ethical banks are banks that prioritize the transparency of all operations and make only social-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.

Other types of banks

• 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. Some governments (or their central banks) restrict the proportion of a bank's balance sheet that can be lent out, and use this as a tool for controlling the money supply. Even where the reserve ratio is not controlled by the government, a minimum figure will still be set by regulatory authorities as part of bank regulation.

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 geographical dispersity 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 crises

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 that 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.

Regulation

Main article: Bank regulation

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

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. 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 banks called ethical banks have emerged, which only make social-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. For example, the largest bank, Citigroup, which for the past 3 years has made more profit than any other company in the world, has only a 5% market share. If Citigroup were to be as dominant in its industry as a Home Depot, Starbucks, or Wal Mart in their respective industries, with a 30% market share -- and if its profit margins scaled up proportionally -- it would make more money than the top ten non-banking U.S. industries combined.

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 moved toward risk-based pricing on loans, which means charging higher interest rates for those people who they deem more risky to default on loans. This dramatically helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and extends credit products to high risk customers who would have been denied credit under the previous system. 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 companies that accept the cards.

The banks' 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 tier 1 capital

Figures in U.S. dollars, and as at end-2005^[2]

1. Citigroup — 79 billion
2. HSBC — 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

Top ten banking groups in the world ranked by assets

Figures in U.S. dollars, and as at end-2004^[3]

1. UBS — 1,533 billion
2. Citigroup — 1,484 billion
3. Mizuho Financial Group — 1,296 billion
4. HSBC Holdings — 1,277 billion
5. Crédit Agricole — 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 bank holding companies in the world ranked by profit

Figures in U.S. dollars, and as 2003

1. Citigroup — 21 billion
2. Bank of America — 15 billion
3. HSBC — 10 billion
4. Royal Bank of Scotland — 8 billion
5. Wells Fargo — 7 billion
6. JP Morgan Chase — 7 billion
7. UBS AG — 6 billion
8. Wachovia — 5 billion
9. Morgan Stanley — 5 billion
10. Merrill Lynch — 4 billion

Top ten banks in the world ranked by market capitalisation

Figures in U.S. dollars, and as at 26 July 2006^[4]

1. Citigroup — 235 billion
2. Bank of America — 230 billion
3. HSBC — 200 billion
4. JPMorgan Chase — 150 billion
5. Mitsubishi UFJ — 145 billion
6. Wells Fargo — 120 billion
7. UBS — 110 billion
8. Royal Bank of Scotland — 100 billion
9. China Construction Bank — 100 billion
10. Mizuho — 95 billion

History of banking

Main article: History of banking

• Florentine banking — The Medicis and Pittis among others
• Banknotes — Introduction of paper money
• Bank of Amsterdam
• Bank of Sweden — The rise of the national banks
• Bank of England — The evolution of modern central banking policies
• Bank of America — The invention of centralized check and payment processing technology
• Swiss bank
• United States Banking
• History of Money and Banking in the United States by Murray N. Rothbard.

Full text (510 pages) in pdf format

• Imperial Bank of Persia — History of banking in the Middle-East

See also

Country specific information

• Banking in Canada
• Banking in the United States
• Banks of the United Kingdom
• List of bank mergers in United States
• Swiss banking
• Australian banks
• Banking in India

Types of institution

• Credit union
• Industrial Loan Company
• Mutual savings bank
• Ethical bank
• Islamic Banking
• Bankers' bank
• Mortgage bank

Terms and concepts

• Bank regulation
• Bank robbery
• Finance
• IBAN
• Internet banking
• Money
• Overdraft
• Overdraft Protection
• Piggy Bank
• SWIFT
• Venture capital
• Wire transfer

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

External links

• Euromoney: The world's largest banks (2006). The world’s largest 250 banks, ranked by shareholder equity. Annual guide to leading banks across the globe by market capitalization, plus other key statistics, including the largest banks in every region.
• FDIC bank market share data
• EH.Net Encyclopedia
• Tiwari, Rajnish and Buse, Stephan (2006): The German Banking Sector: Competition, Consolidation and Contentment, 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 format.

Notes

1. ^ http://www.ifsl.org.uk/uploads/CBS_Banking_2006.pdf chart 28, page 15
2. ^ 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
3. ^ 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
4. ^ 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