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62-509: It can also refer to a bank or a division of a larger bank that deals with corporations or large or middle-sized businesses, to differentiate from retail banks and investment banks . Commercial banks include private sector banks and public sector banks. However, central banks function differently from commercial banks, despite a common misconception known as the "bank analogy". Unlike commercial banks, central banks are not primarily focused on generating profits and cannot become insolvent in

124-412: A bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account. Banks issue new money when they make loans. In contemporary banking systems, regulators set a minimum level of reserve funds that banks must hold against the deposit liabilities created by

186-409: A bank varies from country to country. See the relevant country pages for more information. Under English common law , a banker is defined as a person who carries on the business of banking by conducting current accounts for their customers, paying cheques drawn on them and also collecting cheques for their customers. In most common law jurisdictions there is a Bills of Exchange Act that codifies

248-452: A central role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena (founded in 1472), while the oldest existing merchant bank is Berenberg Bank (founded in 1590). Banking as an archaic activity (or quasi-banking ) is thought to have begun as early as the end of the 4th millennium BCE, to the 3rd millennia BCE. The present era of banking can be traced to medieval and early Renaissance Italy, to

310-485: A combination of both. Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an employee benefit (sometimes called a perk ). Loans can also be categorized according to whether the debtor is an individual person (consumer) or a business. Common personal loans include mortgage loans , car loans, home equity lines of credit, credit cards , installment loans , and payday loans . The credit score of

372-411: A direct auto loan, a bank lends the money directly to a consumer. In an indirect auto loan, a car dealership (or a connected company) acts as an intermediary between the bank or financial institution and the consumer. Other forms of secured loans include loans against securities – such as shares, mutual funds, bonds, etc. This particular instrument issues customers a line of credit based on the quality of

434-425: A large number of small to medium-sized institutions in its banking system. As of November 2009, China's top four banks have in excess of 67,000 branches ( ICBC :18000+, BOC :12000+, CCB :13000+, ABC :24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branches – more than double

496-643: A large scale, financing the purchase of shares in the Suez canal for the British government in 1875. The word bank was taken into Middle English from Middle French banque , from Old Italian banco , meaning "table", from Old High German banc, bank "bench, counter". Benches were used as makeshift desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths. The definition of

558-878: A loan, they automatically create deposits. Regulations In most countries, commercial banks are heavily regulated and this is typically done by a country's central bank . They will impose a number of conditions on the banks that they regulate such as keeping bank reserves and to maintain minimum capital requirements . They also require some capital Commercial banks generally provide a number of services to its clients; these can be split into core banking services such as deposits, loans, and other services which are related to payment systems and other financial services. Along with core products and services, commercial banks perform several secondary functions. The secondary functions of commercial banks can be divided into agency functions and utility functions. Agency functions include: Utility functions include: Bank A bank

620-462: A system known as fractional-reserve banking , under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity , banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords . Banking in its modern sense evolved in the fourteenth century in

682-399: A variety of different ways including interest, transaction fees and financial advice. Traditionally, the most significant method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference

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744-446: Is a bank regulation , which sets a framework within which a bank or depository institution must manage its balance sheet . The categorisation of assets and capital is highly standardised so that it can be risk weighted . After the financial crisis of 2007–2008 , regulators force banks to issue Contingent convertible bonds (CoCos). These are hybrid capital securities that absorb losses in accordance with their contractual terms when

806-436: Is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans . Lending activities can be directly performed by the bank or indirectly through capital markets . Whereas banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized

868-403: Is a list of the largest deals in history in terms of value with participation from at least one bank: Currently, commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate. Usually, the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to

930-475: Is a loan on which the interest is reduced by an explicit or hidden subsidy . In the context of college loans in the United States , it refers to a loan on which no interest is accrued while a student remains enrolled in education. A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods, or

992-418: Is a typical source of funding. A secured loan is a form of debt in which the borrower pledges some asset (i.e., a car, a house) as collateral . A mortgage loan is a very common type of loan, used by many individuals to purchase residential or commercial property. The lender, usually a financial institution, is given security – a lien on the title to the property – until

1054-468: Is discharged of indebtedness. Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The Internal Revenue Code lists "Income from Discharge of Indebtedness" in Section 61(a)(12) as a source of gross income . Example: X owes Y $ 50,000. If Y discharges the indebtedness, then X no longer owes Y $ 50,000. For purposes of calculating income, this

1116-414: Is enforced by contract , which can also place the borrower under additional restrictions known as loan covenants . Although this article focuses on monetary loans, in practice, any material object might be lent. Acting as a provider of loans is one of the main activities of financial institutions such as banks and credit card companies. For other institutions, issuing of debt contracts such as bonds

1178-409: Is not based upon credit score but rather credit rating . The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time. The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is: For more information, see monthly amortized loan or mortgage payments . Predatory lending is one form of abuse in

1240-431: Is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle . Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. In

1302-430: Is to provide financial services to the general public and business, ensuring economic and social stability and sustainable growth of the economy. In this respect, credit creation is the most significant function of commercial banks. While sanctioning a loan to a customer, they do not provide cash to the borrower. Instead, they open a deposit account from which the borrower can withdraw. In other words, while sanctioning

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1364-705: The Federal Deposit Insurance Corporation (FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks. State non-member banks are examined by the state agencies as well as

1426-631: The Great Depression , the U.S. Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s. The 2023 global banking crisis is the latest of these crises: In March 2023, liquidity shortages and bank insolvencies led to three bank failures in the United States , and within two weeks, several of the world's largest banks failed or were shut down by regulators Assets of

1488-474: The 15,000 branches in the United Kingdom. Between 1985 and 2018 banks engaged in around 28,798 mergers or acquisitions, either as the acquirer or the target company. The overall known value of these deals cumulates to around 5,169 bil. USD. In terms of value, there have been two major waves (1999 and 2007) which both peaked at around 460 bil. USD followed by a steep decline (−82% from 2007 until 2018). Here

1550-522: The FDIC. National banks have one primary regulator – the OCC. Each regulatory agency has its own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal inter-agency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although

1612-452: The FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing. Lending In finance , a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing

1674-567: The UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland ) issue their own banknotes in addition to those issued by the Bank of England , the UK government's central bank. Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer  – defined as any entity for which

1736-481: The United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974 . Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of default are severely limited, subjecting the lender to higher risk compared to that encountered for a secured loan. An unsecured lender must sue

1798-421: The acceptable interest rate has varied, from no interest at all as in the biblical prescript, to unlimited interest rates. Credit card companies in some countries have been accused by consumer organizations of lending at usurious interest rates and making money out of frivolous "extra charges". Abuses can also take place in the form of the customer defrauding the lender by borrowing without intending to repay

1860-639: The bank agrees to conduct an account. The law implies rights and obligations into this relationship as follows: These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms or create new rights, obligations, or limitations relevant to the bank-customer relationship. Some types of financial institutions, such as building societies and credit unions , may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules. The requirements for

1922-401: The bank is structured or regulated. The business of banking is in many common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business . When looking at these definitions it is important to keep in mind that they are defining the business of banking for

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1984-416: The bank is to restore, not the same money, but an equivalent sum, whenever it is demanded and money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it is then the money of the banker, who is bound to return an equivalent, by paying a similar sum to that deposited with him, when he is asked for it. The goldsmith paid interest on deposits. Since

2046-411: The bank will not repay it), and interest rate risk (the possibility 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). Banking crises have developed many times throughout history when one or more risks have emerged for the banking sector as a whole. Prominent examples include the bank run that occurred during

2108-667: The bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer , EFTPOS , and automated teller machines (ATMs). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits , and by issuing debt securities such as banknotes and bonds . Banks lend money by making advances to customers on current accounts, by making installment loans , and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and

2170-502: The borrower is a major component in underwriting and interest rates ( APR ) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well. A personal loan can be obtained from banks, alternative (non-bank) lenders, online loan providers and private lenders. Loans to businesses are similar to the above but also include commercial mortgages and corporate bonds and government guaranteed loans Underwriting

2232-413: The borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in

2294-533: The capital of the issuing bank falls below a certain level. Then debt is reduced and bank capitalisation gets a boost. Owing to their capacity to absorb losses, CoCos have the potential to satisfy regulatory capital requirement. The economic functions of banks include: Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to

2356-483: The cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques . Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers in

2418-423: The cross-selling of complementary products. Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Bank capital consists principally of equity , retained earnings and subordinated debt . Some of the main risks faced by banks include: The capital requirement

2480-408: The customer's order – although money lending, by itself, is generally not included in the definition. Unlike most other regulated industries, the regulator is typically also a participant in the market, being either publicly or privately governed central bank . Central banks also typically have a monopoly on the business of issuing banknotes . However, in some countries, this is not the case. In

2542-446: The debt (e.g., a promissory note ) will normally specify, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment. A loan entails the reallocation of the subject asset (s) for a period of time, between the lender and the borrower . The interest provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions

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2604-432: The event of insolvency, the debt may be uncollectible. Demand loans are short-term loans that typically do not have fixed dates for repayment. Instead, demand loans carry a floating interest rate , which varies according to the prime lending rate or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured. A subsidized loan

2666-589: The funding of these loans, in order to ensure that the banks can meet demands for payment of such deposits. These reserves can be acquired through the acceptance of new deposits, sale of other assets, or borrowing from other banks including the central bank. Activities undertaken by banks include personal banking , corporate banking , investment banking , private banking , transaction banking , insurance , consumer finance , trade finance and other related. Banks offer many different channels to access their banking and other services: A bank can generate revenue in

2728-516: The goldsmiths of London became the forerunners of banking by creating new money based on credit. The Bank of England originated the permanent issue of banknotes in 1695. The Royal Bank of Scotland established the first overdraft facility in 1728. By the beginning of the 19th century Lubbock's Bank had established a bankers' clearing house in London to allow multiple banks to clear transactions. The Rothschilds pioneered international finance on

2790-433: The granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over them; subprime mortgage-lending and payday-lending are two examples, where the moneylender is not authorized or regulated , the lender could be considered a loan shark . Usury is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures,

2852-406: The issue of banknotes emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London , who possessed private vaults , and who charged a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee ; these receipts could not be assigned, only

2914-442: The issue of a bank license vary between jurisdictions but typically include: Banks' activities can be divided into: Most banks are profit-making, private enterprises. However, some are owned by the government, or are non-profit organisations . The United States banking industry is one of the most heavily regulated and guarded in the world, with multiple specialised and focused regulators. All banks with FDIC-insured deposits have

2976-409: The largest 1,000 banks in the world grew by 6.8% in the 2008–2009 financial year to a record US$ 96.4 trillion while profits declined by 85% to US$ 115 billion. Growth in assets in adverse market conditions was largely a result of recapitalisation. EU banks held the largest share of the total, 56% in 2008–2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during

3038-436: The law in relation to negotiable instruments , including cheques, and this Act contains a statutory definition of the term banker : banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how

3100-537: The loan. Most of the basic rules governing how loans are handled for tax purposes in the United States are codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations – another set of rules that interpret the Internal Revenue Code). Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower

3162-442: The mortgage is paid off in full. In the case of home loans, if the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. Similarly, a loan taken out to buy a car may be secured by the car. The duration of the loan is much shorter – often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. In

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3224-420: The original depositor could collect the stored goods. Gradually the goldsmiths began to lend money out on behalf of the depositor , and promissory notes , which evolved into banknotes, were issued for money deposited as a loan to the goldsmith. Thus, by the 19th century, we find in ordinary cases of deposits, of money with banking corporations, or bankers, the transaction amounts to a mere loan, or mutuum , and

3286-455: The past 20 years, American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. This helps in making a profit and facilitates economic development as a whole. Recently, as banks have been faced with pressure from fintechs, new and additional business models have been suggested such as freemium, monetisation of data, white-labeling of banking and payment applications, or

3348-438: The promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time-period, this was an early form of fractional reserve banking . The promissory notes developed into an assignable instrument which could circulate as a safe and convenient form of money backed by the goldsmith's promise to pay, allowing goldsmiths to advance loans with little risk of default . Thus

3410-700: The prosperous cities of Renaissance Italy but, in many ways, functioned as a continuation of ideas and concepts of credit and lending that had their roots in the ancient world . In the history of banking , a number of banking dynasties  – notably, the Medicis , the Pazzi , the Fuggers , the Welsers , the Berenbergs , and the Rothschilds  – have played

3472-487: The purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purpose of regulating and supervising banks rather than regulating the actual business of banking. However, in many cases, the statutory definition closely mirrors the common law one. Examples of statutory definitions: Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking ,

3534-411: The quality of pledged collateral before sanctioning the loan. Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages: The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In

3596-570: The rich cities in the centre and north like Florence , Lucca , Siena , Venice and Genoa . The Bardi and Peruzzi families dominated banking in 14th-century Florence, establishing branches in many other parts of Europe. Giovanni di Bicci de' Medici set up one of the most famous Italian banks, the Medici Bank , in 1397. The Republic of Genoa founded the earliest-known state deposit bank, and Banco di San Giorgio (Bank of St. George), in 1407 at Genoa , Italy. Fractional reserve banking and

3658-511: The same way as commercial banks in a fiat currency system. The name bank derives from the Italian word banco 'desk/bench', used during the Italian Renaissance era by Florentine bankers, who used to carry out their transactions on a desk covered by a green tablecloth. However, traces of banking activity can be found even in ancient times. In the United States, the term commercial bank

3720-428: The securities pledged. Gold loans are issued to customers after evaluating the quantity and quality of gold in the items pledged. Corporate entities can also take out secured lending by pledging the company's assets, including the company itself. The interest rates for secured loans are usually lower than those of unsecured loans. Usually, the lending institution employs people (on a roll or on a contract basis) to evaluate

3782-459: The year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment in banking totalled US$ 66.3 billion in 2009, up 12% on the previous year. The United States has the most banks in the world in terms of institutions (5,330 as of 2015) and possibly branches (81,607 as of 2015). This is an indicator of the geography and regulatory structure of the US, resulting in

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3844-555: Was often used to distinguish it from an investment bank due to differences in bank regulation. After the Great Depression , through the Glass–Steagall Act , the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited to capital market activities. This separation was mostly repealed in 1999 by the Gramm–Leach–Bliley Act . The general role of commercial banks

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