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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 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.
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 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
- Citigroup 20 billion
- Bank of America 15 billion
- HSBC 10 billion
- RBS 8 billion
- Wells Fargo 7 billion
- JP Morgan Chase 7 billion
- United Bank of Switzerland (UBS) 6 billion
- Wachovia Bank 5 billion
- Morgan Stanley 5 billion
- Merrill Lynch 4 billion
History of Banking
See Also
Related topics
External Link
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.
Alternative meaning #3
A bank is also an elevation, or rising ground, under the sea; a shoal, shelf, or shallow; as, Georges
Banks.
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