Bank

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For other uses, see Bank (disambiguation).

The essential function of a bank is to provide services related to the storing of deposits and the extending of 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 as an institution that holds a banking license. Banking licenses are 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 certain banking services without meeting the legal definition of a bank, a so called non-banking financial company. Banks are a subset of the financial services industry.

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

Typically, a bank generates profits from transaction fees on financial services and on the interest it charges for lending.

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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:

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Types of banks

There are 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. They are often charged with controlling the money supply, including printing paper money. Examples of central banks are the Bank of England, the European Central Bank and the U.S. Federal Reserve Bank.
  • Commercial bank, is the term used for a normal bank to distinguish it from an investment bank. 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 corporations or large businesses.
  • Community development bank are regulated banks that provide financial services and credit to underserved markets or populations.
  • Investment banks "underwrite" (guarantee the sale of) stock and bond issues and advise on mergers. Examples of investment banks are Goldman Sachs of the USA or Nomura Group of Japan.
  • Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provides capital to firms in the form of shares rather than loans. Unlike Venture capital firms, they tend not to invest in new companies.
  • Offshore banks are banks located in jurisdictions with low taxation and regulation, such as Switzerland or the Channel Islands. Many offshore banks are essentially private banks.
  • Postal savings banks are savings banks associated with national postal systems. Japan and Germany are examples of countries with prominent postal savings banks.
  • Private banks manage the assets of high net worth individuals.
  • Retail banks primary customers are individuals. An example of a retail bank is Washington Mutual of the USA.
  • Savings banks traditionally accepted savings deposits and issued mortgages. Today, some countries have broadened the permitted activities of savings banks.
  • Universal banks, more commonly known as a financial services company, engage in several of these activities. For example, Citigroup, a very large American bank, is involved in commercial and retail lending; it owns a merchant bank (Citicorp Merchant Bank Limited) and an investment bank (Salomon Smith Barney); it operates a private bank (Citigroup Private Bank); finally, its subsidiaries in tax-havens offer offshore banking services to customers in other countries. Almost all large financial institutions are diversified and engage in multiple activities. In Europe, big banks are very diversified groups that, among other services, distribute also insurance, whence the bancassurance term.
  • Islamic Banks,Islamic banking revolves around several well-established concepts - based on Islamic canons. Concept of Interest, in Islam is forbidden. Hence, all banking activities must avoid interest. Instead of interest, the Bank earns profit (mark-up) and fees on financing facilities it extends to customers. Also, depositors earn a share of the Bank’s profit as opposed to interest.
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Susceptibility to 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 withdrawls 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, and the banking crisis that developed during the Great Depression.

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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.

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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.

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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.

“The bank is something else than men. It happens that every man in a bank hates what the bank does, and yet the bank does it. The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath

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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 company's 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 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 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 the crossing 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.

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Top ten banking groups in the world ranked by tier-one capital in 2004 (In U.S. Dollars)

  1. Citigroup — 73 billion
  2. JP Morgan Chase — 69 billion
  3. HSBC — 67 billion
  4. Bank of America — 64 billion
  5. Credit Agricole Group — 63 billion
  6. Royal Bank of Scotland — 43 billion
  7. Mitsubishi Tokyo Financial Group — 40 billion
  8. Mizuho Financial Group — 39 billion
  9. HBOS — 36 billion
  10. BNP Paribas — 35 billion
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Top ten banking groups in the world ranked by assets in 2003 (In U.S. Dollars)

  1. Mizuho Financial Group — 1,265 billion
  2. Citigroup — 1,097 billion
  3. Allianz — 1,002 billion
  4. UBS — 907 billion
  5. Sumitomo Mitsui Financial Group — 903 billion
  6. Deutsche Bank — 892 billion
  7. Fannie Mae — 888 billion
  8. ING Group — 843 billion
  9. BNP Paribas — 835 billion
  10. Mitsubishi Tokyo Financial Group — 832 billion
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Top ten bank holding companies in the world ranked by profit in 2003 (In U.S. Dollars)

  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
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Top ten bank holding companies in the U.S. ranked by deposits

As of June 30, 2004. These are U.S. deposits only. This is not a ranking of the largest U.S. based global banks.

  1. Bank of America Corp. — 526 billion
  2. Wells Fargo & Co. — 256 billion
  3. Wachovia Corp. — 238 billion
  4. J.P. Morgan Chase & Co. — 227 billion (1)
  5. Citigroup Inc. — 193 billion
  6. Bank One Corp. — 150 billion (1)
  7. U.S. Bancorp — 112 billion
  8. SunTrust Banks, Inc. — 78 billion
  9. BB&T Corporation — 67 billion
  10. National City Corp. — 64 billion

(1) Since this report, J.P. Morgan Chase & Co. has acquired Bank One Corp., making the combined 6/30/04 deposit total for the merged company $377 billion, vaulting it to second place on the list.

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History of banking

Main article: History of banking

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See also

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Related topics

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External links

Retrieved from "http://en.wikipedia.org/wiki/Bank"
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