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Bank
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Bank

The essential function of a bank is provide services related to storing of value and extending credit. The evolution of banking dates back to the earliest writing, and continues in the present where a bank is a financial institution that provides banking and other financial services. Currently the term bank is generally understood an institution that holds a banking license. Banking licenses are granted by financial supervision 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 certain banking services without meeting the legal definition of a bank, a so called non-bank. Banks are a subset of the Financial Services industry.

The word bank is derived from the Italian banca, which is derived from German 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.

Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset.

Table of contents
1 Services typically offered by banks
2 Types of banks
3 Banks are prone to crisis
4 Role in the money supply
5 Regulation
6 How banks are viewed
7 Profitability
8 Top ten banks in the world ranked by profit in 2003
9 History of Banking
10 See Also
11 Related topics
12 External link
13 Alternative meanings

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:

Types of banks

There are several different types of banks including:

Banks are prone to crisis

The traditional bank has an inherent tendency to crisis. This is because the bank borrows short term and lends leveraged long term. The sum of deposits and the bank's capital will never equal more than a modest percentage of the loans the bank has outstanding.

Even if liquidity is not a concern, if there is no run on the bank, banks can simply choose a bad portfolio of loans, and lose more money than they have. The US Savings and Loan Crisis in the late 1980's and early 1990s is such an incident.

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 securities 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 banking supervision.

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.

How banks are viewed

Banks have a long history of being characterized as heartless, rapacious creditors, hounding honest folk down on their luck for the last dime. See Populism.

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.

Profitability

Banks in the United States are by far 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 company's profits. For example, the largest bank, Citigroup, which for the past 3 years has made more profit then any other company in the world, has only a 5 percent market share. Now 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 percent market share, it would make more money than the top ten non-banking US industries combined.

In the past 10 years in the United States, banks have taken many measures to ensure their profitability dominance. Firstly this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. This allows them to make profit no matter what the economy is like, because people will almost always put their money in one of those 3 options. Secondly, they have introduced 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. Thirdly, they are by far the main method of payment processing. Since there have been no government-issued smart cards, which would be the equivalent of cash, bank debit, check, and credit card use has been the main method of exchanging money.

This allows banks to essentially tax all movement of money, and the movement of money is essentially independent of the state of the economy. The banks' main obstacle to making more money is new government regulation.

Top ten banks in the world ranked by profit in 2003

  1. Citigroup — 20 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

History of Banking

See Also

Related topics

External link

Alternative meanings