Bank

A bank is a financial institution that provides banking and other financial services. By the term bank is generally understood an institution that holds a banking license. Banking licenses are granted by financial supervision authorities and provides rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provides certain banking services without meeting the legal definition of a bank, a so called Non-bank.

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 History of Banking
9 See Also
10 Related topics
11 Alternative meaning #1
12 Alternative meaning #2

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:

Lend out money to companies and individuals (see moneylender)
Issue checks and credit cards
Fascilitate money transactions
Issue debit cards
Storage of valuables, particularly in a safety deposit box

Types of banks

There several different types of banks including:

Central banks usually control monetary policy and may be the lender of last resort in the event of a crisis
Investment banks underwrite stock and bond issues and advise on mergers
Merchant banks engage in trade financing
Private banks manage the assets of "high net worth" (rich) individuals
Savings banks write mortgages exclusively
Offshore banks are banks located in jurisdictions with low taxation and regulation
Commercial banks are otherwise undistinguished

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 banks 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 early 1990s is such an incedent.

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 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 lead to banking being thoroughly regulated. The amount of capital a bank is required to hold is a function of the amount and quality of the loans outstanding. Major banks are subject to the Basel Capital Accord proglemated 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 there are, 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 amount of those companies profits. For example, the largest bank, Citigroup, which for the past 3 years has made more profit then any other company in the world, only has 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 then 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 Gram-Leach-Biley 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.

History of Banking

Florentine banking - The Medicis and Pittis amongs 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
United States Banking

Alternative meaning #1

Bank can also refer to the area of London close to the Bank of England, and to Bank tube station.

Alternative meaning #2

Bank can be the action of an aircraft when it lowers one wing and raises the other.