Banks and Banking

A bank is an institution that provides financial service, particularly taking deposits and extending credit.

Banks and Banking

A bank is an institution that provides financial service, particularly taking deposits and extending credit.

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 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 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.

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

Contents:
1 Services typically offered by banks
2 Types of banks
2.1 Types of retail bank
2.2 Types of Investment Banks
2.3 Both combined
2.4 Other types of banks
3 Banks in the economy
3.1 Role in the money supply
3.2 Bank crises
4 Regulation
5 Public perceptions of banks
6 Profitability
7 Bank Size Information
7.1 Top ten banking groups in the world ranked by tier-one capital in 2004 (In U.S. Dollars)
7.2 Top ten banking groups in the world ranked by assets in 2003 (In U.S. Dollars)
7.3 Top ten bank holding companies in the world ranked by profit in 2003 (In U.S. Dollars)
7.4 Top ten bank holding companies in the U.S. ranked by deposits (In U.S. Dollars) 8 History of banking

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 the general public and issuing checking and savings accounts
Making loans to indivudals and businesses
Cashing cheques
Facilitating money transactions such as wire transfers and cashiers checks
Issuing credit cards, ATM, and debit cards
Storing valuables, particularly in a safe deposit box

Types of banks

Banks' activities can be characterised as retail banking, dealing direct 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 tasked with responsibility for 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 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.

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.

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.

Savings banks traditionally accepted savings deposits and issued mortgages. Today, some countries have broadened the permitted activities of savings banks. Building societies and Landesbanks both conduct retail banking

Types of Investment Banks

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.

Both combined

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 and Asia, big banks are very diversified groups that, among other services, distribute also insurance, whence the bancassurance term.

Other types of banks

Islamic banks adhere to the concepts of Islamic banking. 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.

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, and 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 are outraged due to various banking policies that take advantage of consumers. Specific concerns are policies that permit banks to hold deposited funds for several days, policies that permit banks to apply withdrawals before deposits, policies that permit applying withdrawals from greatest to least, which is most likely to cause the greatest overdraft, policies that allow backdating funds transfers and fee assessments, and policies that authorize electronic funds transfers despite an overdraft.

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.

Bank Size Information

Top ten banking groups in the world ranked by tier-one capital in 2004 (In U.S. Dollars)
Citigroup — 73 billion
JP Morgan Chase — 69 billion
HSBC — 67 billion
Bank of America — 64 billion
Credit Agricole Group — 63 billion
Royal Bank of Scotland — 43 billion
Mitsubishi Tokyo Financial Group — 40 billion
Mizuho Financial Group — 39 billion
HBOS — 36 billion
BNP Paribas — 35 billion

Top ten banking groups in the world ranked by assets in 2003 (In U.S. Dollars)
Mizuho Financial Group — 1,265 billion
Citigroup — 1,097 billion
Allianz — 1,002 billion
UBS — 907 billion
Sumitomo Mitsui Financial Group — 903 billion
Deutsche Bank — 892 billion
Fannie Mae — 888 billion
ING Group — 843 billion
BNP Paribas — 835 billion
Mitsubishi Tokyo Financial Group — 832 billion

Top ten bank holding companies in the world ranked by profit in 2003 (In U.S. Dollars)
Citigroup — 21 billion
Bank of America — 15 billion
HSBC — 10 billion
Royal Bank of Scotland — 8 billion
Wells Fargo — 7 billion
JP Morgan Chase — 7 billion
UBS AG — 6 billion
Wachovia — 5 billion
Morgan Stanley — 5 billion
Merrill Lynch — 4 billion

Top ten bank holding companies in the U.S. ranked by deposits (In U.S. Dollars)

As of June 30, 2004. These are U.S. deposits only. This is not a ranking of the largest U.S. based global banks.
Bank of America Corp. — 526 billion
Wells Fargo & Co. — 256 billion
Wachovia Corp. — 238 billion
J.P. Morgan Chase & Co. — 227 billion (1)
Citigroup Inc. — 193 billion
Bank One Corp. — 150 billion (1)
U.S. Bancorp — 112 billion
SunTrust Banks, Inc. — 78 billion
BB&T Corporation — 67 billion
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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