Bank

Financial Institution Which Accepts Deposits: A Bank's Unimpressive Existence

This article details the often-overlooked, yet undeniably central, financial organization known as a bank, which inexplicably provides money under various conditions. For those who still manage to confuse it, see Bank (disambiguation).

"Banks" and "Banker" are terms that, much like certain individuals, demand more attention than they perhaps deserve. For other uses, if you insist, see Banks (disambiguation) and Banker (disambiguation).
Part of a series on the baffling complexities of financial services known as Banking.

The venerable Bank of England, an institution established in 1694, stands as a testament to humanity's enduring need to formalize the exchange of promises and coin.

Types of Banks

Lists of banks exist, for those who enjoy exhaustive classifications.

Accounts · Cards

Accounts

Cards

Funds Transfer

Terms

History

Archaic (or Quasi-Banking)

Main article: History of banking

This 15th-century painting depicts money-dealers at a banca (bench) during the Cleansing of the Temple, a scene that perhaps foreshadows future debates about the ethics of financial institutions.

The concept of banking, or at least activities that very closely resemble it—what some refer to as "quasi-banking"—is not a recent phenomenon but a deeply ingrained aspect of human societal development. Scholars generally posit that these rudimentary forms of financial intermediation began as early as the end of the 4th millennium BCE, extending into the 3rd millennia BCE. In these ancient times, the earliest "banks" were often temples or royal palaces. These institutions, already centers of trust and power, served as safe havens for storing grain, precious metals, and other valuables. Priests and scribes, acting as early "bankers," would record deposits and withdrawals, essentially managing rudimentary accounts. This system not only provided security for stored goods but also facilitated early forms of lending, where surplus grain could be distributed to farmers in times of need, with an expectation of repayment after harvest, often with interest. This suggests that the fundamental principles of trust, storage, and lending, which underpin modern banking, are as old as organized agriculture and governance itself. The idea that someone would hold your valuable assets, and perhaps even lend them out, is a concept that has echoed through the ages, simply evolving in sophistication, not in its core intent.

Medieval

In Europe, among the first recorded instances of what could be considered private banking operations, with a surprising degree of sophistication for their era, were those run by the enigmatic Knights Templar. These warrior monks, beyond their crusading endeavors, provided an invaluable service for pilgrims embarking on the perilous journey to Jerusalem. To mitigate the ever-present threat of brigands and highway robbers, who were all too eager to relieve travelers of the substantial sums of money required for such a pilgrimage, pilgrims would deposit their funds at a Templar stronghold. In return, they received a special receipt, a kind of medieval traveler's check, that certified their deposit. This ingenious system allowed them to travel unburdened by large caches of coin and, crucially, to withdraw funds along their route at other Templar strongholds to purchase necessities. This proto-banking service, offering both security and liquidity across vast distances, was provided by the organization from the 12th century until their rather dramatic and unfortunate disbandment in the early 14th century.

The direct lineage of the modern banking era, however, is more commonly traced to the wealthy and fiercely competitive medieval Renaissance Italian city-states. Here, powerful and politically astute elite families, such as the Bardi and Peruzzi, rose to prominence, dominating banking in 14th-century Florence. Their influence was not confined to a single city; they swiftly established branches and networks across many other parts of Europe, effectively laying the groundwork for international finance. Giovanni di Bicci de' Medici, a figure who understood the enduring power of money, established one of the most famous and influential Italian banks, the Medici Bank, in 1397, cementing his family's legacy. This private enterprise was soon followed by public initiatives: the Consell de Cent founded the earliest-known state deposit bank, the Taula de canvi de Barcelona (Table of Change), in 1401 in Barcelona. This model of public banking was further developed with the creation of The Bank of Saint George in 1407 at Genoa, Italy, demonstrating a growing recognition of banking's systemic importance beyond individual family fortunes.

Early Modern

Further information: History of banking in the United Kingdom The sealing of the Bank of England Charter (1694), depicted by Lady Jane Lindsay in 1905, marks a pivotal moment in the formalization of national banking.

The 17th and 18th centuries witnessed the transformative emergence of fractional reserve banking and the widespread issue of banknotes, fundamentally reshaping financial systems. This evolution began rather humbly with merchants in London seeking secure storage for their gold. They turned to local goldsmiths, who, possessing robust private vaults, offered this service for a fee. Initially, for each deposit of precious metal, goldsmiths issued simple receipts that meticulously certified the quantity and purity of the metal held as a bailee. These early receipts were non-assignable, meaning only the original depositor could reclaim their stored goods—a rather restrictive, if secure, system.

However, the inherent practicality of this arrangement soon led to a more dynamic model. Gradually, the more astute goldsmiths began to realize the potential of lending out a portion of the deposited money, knowing that not all depositors would demand their gold back simultaneously. In this new phase, promissory notes, which would eventually evolve into the banknotes we know today, were issued not just for stored gold, but for money deposited specifically as a loan to the goldsmith. By the 19th century, this practice had fundamentally altered the nature of a deposit: ordinary deposits of money in banks had ceased to be a mere safekeeping arrangement and had become, in legal terms, a loan, or mutuum. As famously articulated in legal precedent: "Money, when paid into a bank, ceases altogether to be the money of the principal... 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 goldsmiths, now acting as proto-bankers, began paying interest on deposits, a clear incentive for customers to part with their gold. The genius, or perhaps the audacity, of this system lay in the mismatch: these promissory notes were payable on demand, offering instant liquidity, while the advances (loans) made by the goldsmiths to their customers were repayable over longer time-periods. This was, in essence, an early and remarkably effective form of fractional reserve banking. The promissory notes themselves evolved into assignable instruments, capable of circulating as a safe and convenient form of money, backed by the goldsmith's promise to pay. This innovation allowed goldsmiths to extend loans with considerably less risk of default than if they were dealing purely in physical specie. Thus, the goldsmiths of London inadvertently became the true forerunners of modern banking, demonstrating the potent power of creating new money based on credit rather than solely on tangible assets.

An interior view of the Helsinki Branch of the Vyborg-Bank, circa the 1910s, illustrating the formalization of banking spaces.

The Bank of England further solidified this evolution, initiating the permanent issue of banknotes in 1695, establishing a national currency standard. A few decades later, the Royal Bank of Scotland introduced another significant innovation, establishing the very first overdraft facility in 1728, offering customers a flexible line of credit. By the dawn of the 19th century, the growing volume of interbank transactions necessitated more efficient processing. Lubbock's Bank responded by establishing a bankers' clearing house in London, streamlining the settlement of transactions between multiple banks. On a grander, international scale, the Rothschilds pioneered international finance, demonstrating the immense power of cross-border capital. Their legendary exploits included financing the British government's crucial purchase of shares in the Suez canal in 1875, a transaction that underscored their unparalleled influence and reach in global financial markets.

Modern

The 20th century, a period marked by relentless technological acceleration, brought about seismic shifts in the banking landscape. Developments in telecommunications and computing were not mere conveniences; they fundamentally altered banks' operations, allowing them to expand dramatically in both size and geographic reach, transcending previous limitations of physical presence. This era of seemingly boundless growth, however, was punctuated by stark reminders of inherent fragilities. The 2008 financial crisis served as a brutal, if predictable, lesson, leading to numerous bank failures, including some of the world's largest and most seemingly impregnable institutions. This catastrophic event, much like a cosmic reminder of humanity's hubris, inevitably provoked an intense and ongoing debate about the necessity and efficacy of bank regulation—a discussion that, despite its urgency, often feels like rearranging deck chairs on a perpetually listing ship.

Etymology

The word "bank," a term now imbued with a certain gravitas and complexity, was not always so. It entered Middle English from the Middle French "banque," which itself derived from the Old Italian "banco," simply meaning "table." This humble origin points to a more grounded reality: during the Renaissance, the early Florentine bankers, those astute individuals who first formalized the exchange of currency and credit, conducted their transactions quite literally atop makeshift desks or exchange counters. These surfaces were often covered by distinctive green tablecloths, a detail that, while seemingly trivial, underscores the very practical and unglamorous beginnings of an industry that would eventually shape global economies. It’s almost amusing how such a simple piece of furniture gave its name to an institution of such immense, often overwhelming, power.

Definition

The precise definition of a "bank" is not, much like many things in life, universally agreed upon; it varies considerably from country to country, reflecting diverse legal traditions and regulatory philosophies. For a truly exhaustive, and likely exhausting, understanding, one would need to consult the relevant country-specific pages.

Under English common law, a "banker" is traditionally, and rather elegantly, defined as a person or entity that engages in the business of banking primarily by maintaining current accounts for their customers. This core activity involves the crucial functions of paying checks drawn on those accounts and, conversely, collecting checks deposited into them on behalf of their customers. It's a definition rooted in historical practice, emphasizing the transactional hub that a bank represents.

In most common law jurisdictions, a Bills of Exchange Act exists, a legislative framework designed to codify the intricate laws governing negotiable instruments, including checks. Within this Act, one finds a statutory definition of the term "banker": "banker includes a body of persons, whether incorporated or not, who carry on the business of banking." While this definition might initially strike one as frustratingly circular, it is, in fact, remarkably functional. Its purpose is to ensure that the fundamental legal basis for bank transactions, such as the clearing of checks, remains robust and independent of the specific corporate structure or regulatory classification of the entity performing the banking function. It’s a pragmatic approach to a practical problem.

The majestic Banco de Venezuela building in Coro, a testament to financial presence. A branch of Nepal Bank in Pokhara, Western Nepal, demonstrating global reach.

In many common law countries, the core "business of banking" isn't explicitly defined by statute but rather by the accumulated wisdom and precedent of common law, largely adhering to the definition outlined above. However, in other English common law jurisdictions, one encounters specific statutory definitions for "the business of banking" or "banking business." When examining these statutory definitions, it's crucial to remember their context: they are typically crafted for the specific purposes of the legislation in which they appear, often focused on regulating and supervising banks rather than providing a universal, overarching definition of banking itself. Yet, despite these legislative nuances, many of these statutory definitions closely mirror the established common law understanding. Consider these illustrative examples:

"banking business" means the business of receiving money on current or deposit account, paying and collecting checks drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation). This definition expands beyond simple check transactions to include the fundamental activity of making advances (loans), acknowledging the dual nature of banking.
"banking business" means the business of either or both of the following:
- receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period;
- paying or collecting checks drawn by or paid in by customers. This definition, seen in jurisdictions like Hong Kong, notably broadens the scope of "deposits" to include various short-term liabilities, emphasizing the critical role of managing public funds. (Banking Ordinance, Section 2, Interpretation, Hong Kong). In this context, the definition is notably extended to encompass accepting any deposits repayable in less than 3 months. Furthermore, companies that accept deposits greater than HK$100,000 for periods exceeding 3 months are regulated specifically as deposit taking companies rather than as full-fledged banks in Hong Kong, highlighting a tiered regulatory approach.

With the relentless march of technology, methods like EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit, and internet banking have increasingly eclipsed the humble check in most banking systems as the primary instrument of payment. This undeniable shift has prompted legal theorists to suggest that the traditionally check-centric definition of banking is, frankly, outdated and should be broadened. They argue for an updated definition that includes financial institutions that maintain current accounts for customers and enable those customers to make and receive payments from third parties, even if the institution itself no longer engages in the physical payment and collection of checks. It’s a logical evolution, albeit one that the legal system tends to adopt at a pace that could be described as glacial.

Standard Business

A large, imposing door to an old bank vault—a visual metaphor for the security and mystery that banks cultivate.

At their core, banks operate as essential payment agents, meticulously maintaining checking or current accounts for their customers. This involves the prosaic, yet crucial, tasks of honoring checks drawn by customers and diligently collecting checks deposited into customers' current accounts. Beyond these traditional paper-based transactions, banks have, begrudgingly perhaps, embraced modernity, enabling customer payments through a diverse array of electronic methods. These include the Automated Clearing House (ACH) for bulk transfers, Wire transfers or telegraphic transfer for rapid, high-value movements, EFTPOS for point-of-sale efficiency, and the omnipresent automated teller machines (ATMs) for ubiquitous cash access.

On the other side of the ledger, banks engage in the fundamental act of borrowing money. This is primarily achieved by accepting funds deposited into current accounts, but also through the more structured acceptance of term deposits, and by issuing various debt securities, such as their own banknotes (in some jurisdictions) and bonds. Having amassed these funds, banks then pivot to their lending function, providing money by extending advances to customers on current accounts, originating installment loans for consumers and businesses, and strategically investing in marketable debt securities and other forms of money lending. It's a perpetual cycle of intake and outflow, managed with varying degrees of success.

Banks provide a suite of payment services that, for most businesses and individuals, render a bank account virtually indispensable in modern society. While non-bank entities, such as remittance companies, offer certain payment services, they are generally not considered an adequate or comprehensive substitute for the multifaceted utility of a full-fledged bank account. The convenience, security, and broad range of services offered by banks remain, for now, unparalleled.

Crucially, in contemporary fractional-reserve banking systems, banks possess the rather remarkable ability to issue new money whenever they extend loans. This isn't just a transfer of existing funds; it's an expansion of the money supply itself. Conversely, when the principal on that loan is repaid, an equivalent amount of money is, in effect, destroyed. To ensure that banks can meet the demands for payment of these newly created deposits, regulators impose a minimum level of reserve funds that banks must hold. These reserves, a safety net of sorts, can be accumulated through the acceptance of new deposits, the strategic sale of other assets, or by borrowing from other banks, including the ultimate backstop: the central bank. It's a delicate balance, constantly monitored, often imperfectly.

Range of Activities

The activities undertaken by banks are, much like the human condition, diverse and often segmented. They span the spectrum from the highly personal to the intensely corporate, encompassing: personal banking, which caters to individual consumers; corporate banking, tailored for large business entities; the high-stakes world of investment banking, dealing with financial markets and corporate finance; the discreet services of private banking, managing the wealth of the affluent; transaction banking, focusing on payments and trade; the often-intertwined realm of insurance; the ubiquitous consumer finance sector; trade finance, facilitating international commerce; and a litany of other related, often specialized, financial endeavors. It's a sprawling ecosystem, each part designed to extract value from a different facet of economic activity.

Channels

An American bank branch in Maryland, a physical manifestation of financial access.

Banks, in their tireless pursuit of customer engagement (or perhaps, customer retention), offer a multitude of channels through which individuals and businesses can access their banking and other services. This evolution from purely physical to increasingly digital access reflects a desperate attempt to keep pace with modern life:

Branch, in-person banking: The traditional brick-and-mortar retail location, where one can still, if one insists, interact with another human being about their finances. A dying art, perhaps.
Automated teller machine banking: The ubiquitous ATM, conveniently located adjacent to or, more often, remotely from the actual bank, offering 24/7 access to cash and basic transactions. A testament to automation, for better or worse.
Bank by mail: A quaint, almost archaic method where most banks still accept check deposits via postal service and communicate vital (or utterly mundane) information to their customers through the mail. Slow, but reliable, like a forgotten memory.
Online banking: The internet-based portal that allows customers to perform a dizzying array of transactions from the comfort of their own digital device. Efficient, yes, but often lacking the subtle nuances of human interaction that some still crave, or perhaps, simply tolerate.
Mobile banking: The ultimate expression of convenience, allowing individuals to conduct banking transactions directly from their mobile phones. Banking, now literally in the palm of your hand, for better or for the inevitable security breach.
Telephone banking: A service that permits customers to conduct transactions over the phone, either through the relentless cheerfulness of an automated attendant or, if one is truly persistent, with the fleeting assistance of a live telephone operator.
Video banking: A newer, somewhat unsettling development that enables banking transactions or professional consultations via a remote video and audio connection. This can be done through purpose-built banking transaction machines (reminiscent of an ATM, but with more forced eye contact) or via a video conference enabled bank branch, blurring the lines between physical and virtual interaction.
Relationship manager: Primarily deployed for the privileged few in private banking or high-value business banking, these individuals provide a more personalized touch, often visiting customers at their homes or businesses. Because some people still require a human face for their vast sums of money.
Direct Selling Agent: An individual working for the bank under contract, whose primary, often thankless, task is to expand the bank's customer base. A necessary evil in the relentless pursuit of growth.

Business Models

A bank, in its relentless pursuit of continued existence, generates revenue through a variety of convoluted methods, including, but not limited to, interest charges, transaction fees, and the occasional, often self-serving, piece of financial advice. Traditionally, and perhaps most straightforwardly, the most significant method of revenue generation has been through the charging of interest on the capital it lends out to customers. The bank's profit, that elusive entity, is derived from the often-slight, yet cumulatively vast, difference between the interest it pays for deposits and other sources of funds, and the higher interest it charges in its lending activities. This differential, known in polite circles as the spread between the cost of funds and the loan interest rate, is the bread and butter of traditional banking. Historically, profitability derived from these lending activities has been predictably cyclical, waxing and waning with the fluctuating needs and financial strengths of loan customers, and, of course, the ever-unpredictable stage of the broader economic cycle. Recognizing the inherent volatility of this model, banks have, with a certain pragmatic desperation, increasingly emphasized fees and financial advice as a more stable and predictable revenue stream, hoping to smooth out their financial performance and avoid the dizzying highs and terrifying lows of pure lending.

Over the past two decades, American banks, ever resourceful in the face of adversity, have implemented numerous strategies to ensure their continued profitability amidst the relentless churn of changing market conditions.

Firstly, this strategic adaptation notably includes the Gramm–Leach–Bliley Act, a legislative maneuver that permitted banks to once again merge with investment and insurance houses. The rationale behind this consolidation was simple, if a touch optimistic: by integrating banking, investment, and insurance functions, traditional banks could ostensibly respond to increasing consumer demands for "one-stop shopping." The banks, naturally, harbored the hope that this would facilitate aggressive cross-selling of products, thereby, in their estimation, increasing overall profitability. Whether this truly benefits the consumer or merely streamlines the extraction of their wealth is, as always, open to interpretation.
Secondly, banks have aggressively expanded the application of risk-based pricing. This practice, once largely confined to business lending, is now a pervasive feature of consumer lending. In essence, it means charging higher interest rates to those customers deemed to be a higher credit risk, and thus more likely to default on their loans. This strategy, while seemingly equitable, serves a dual purpose: it helps to offset potential losses from bad loans and, somewhat ironically, allows for lower interest rates for those with impeccable credit histories. It also, conveniently, permits the extension of credit products to high-risk customers who might otherwise be outright denied credit, expanding the potential pool of borrowers (and, inevitably, defaults).
Thirdly, banks have tirelessly sought to diversify and increase the methods of payment processing available to both the general public and their business clients. This proliferation of options includes debit cards, various forms of prepaid cards, smart cards, and the ever-present credit cards. These instruments are marketed as making it easier for consumers to conveniently execute transactions and, with a touch of economic jargon, to smooth their consumption over time. This is particularly relevant in countries with less developed financial systems, where the sight of individuals carrying suitcases full of cash to purchase a home is not an uncommon, if rather cinematic, occurrence.

However, the undeniable convenience of easy credit comes with a predictable, and often devastating, caveat: an increased risk that consumers will mismanage their financial resources and accumulate crippling, excessive debt. Banks, ever the pragmatists, derive significant revenue from these card products through the interest charges and various fees levied upon credit and debit card holders, as well as through transaction fees charged to retailers who accept the bank's cards for payments. This intricate web of fees and interest, while undeniably contributing to bank profits, also, by some twisted logic, facilitates overall economic development.

More recently, as banks find themselves under increasing pressure from agile fintechs—those digital upstarts threatening to disrupt the established order—new and additional business models have been floated. These include the allure of freemium services, the monetization of customer data (a goldmine, apparently), the white-labeling of banking and payment applications for other businesses, or the ever-popular strategy of cross-selling complementary products. It's a clear indication that even the most entrenched institutions are scrambling to adapt, lest they be rendered obsolete by the relentless march of innovation.

Products

A former building society, now a modern retail bank in Leeds, West Yorkshire—a subtle shift in nomenclature, perhaps, but the core function remains. An interior view of a branch of National Westminster Bank on Castle Street, Liverpool, demonstrating the formal, if somewhat sterile, environment of modern banking.

Retail

These are the products designed for the masses, the everyday financial tools that keep the wheels of personal commerce turning:

ATM card: Your gateway to automated cash and basic transactions.
Credit card: The ubiquitous instrument of delayed gratification and, for many, inevitable debt.
Debit card: The more grounded sibling, spending only what you actually possess.
Savings account: A repository for your meager surplus, earning negligible interest.
Recurring deposit account: A disciplined approach to saving, for those who need a nudge.
Fixed deposit account: Locking away funds for a predetermined period, often for a slightly less negligible return.
Money market account: A hybrid, offering some liquidity with slightly better interest than a traditional savings account.
Certificate of deposit (CD): Similar to a fixed deposit, but often with more formal terms.
Individual retirement account (IRA): A tax-advantaged vehicle for deferring the existential dread of old age.
Mortgage: The colossal loan that anchors most people to a piece of property, and a lifetime of payments.
Mutual fund: A pooled investment vehicle, allowing the average person to dabble in the markets without quite understanding them.
Personal loan (Secured and Unsecured Personal loan): Funds borrowed for various personal needs, with or without collateral, often at rates that make one wince.
Time deposits: Funds held for a specific period, a testament to deferred gratification.
Current accounts: The bedrock of daily transactions, offering immediate access to funds.
Check (financial instrument): A paper instruction to transfer funds, increasingly a relic of a bygone era.
Automated teller machine (ATM): The tireless robot dispensing cash and basic services.
National Electronic Fund Transfer (NEFT): A system for electronic funds transfer within a nation.
Real-time gross settlement (RTGS): For those who demand immediate, irrevocable settlement of large-value interbank funds transfers.

Business (or Commercial/Investment) Banking

For the more demanding, and typically larger, entities, banks offer a more specialized suite of products:

Business loan: Capital extended to enterprises for expansion, operations, or simply to keep the lights on.
Capital raising (equity / debt / hybrids): Assisting companies in securing the necessary funds from public or private markets.
Revolving credit: A flexible line of credit that can be drawn upon, repaid, and redrawn, much like a perpetually open tab.
Risk management (foreign exchange (FX), interest rates, commodities, derivatives): Sophisticated tools and strategies to mitigate the myriad financial risks inherent in business.
Term loan: A lump sum loan with a fixed repayment schedule, a more structured approach to borrowing.
Cash management services (lock box, remote deposit capture, merchant processing): Solutions designed to optimize the flow and utilization of a business's cash.
Credit services: A broad category encompassing various forms of credit provision and assessment.
Securities Services: Safekeeping, administration, and servicing of financial assets for institutional clients.

Capital and Risk

Specific banking frameworks
Market risk
FRTB
Internal models approach (IMA)
Standardized approach (market risk)
Credit risk
Internal ratings-based approach (IRB)
Foundation IRB (F-IRB)
Advanced IRB (A-IRB)
Standardized approach (credit risk)
Counterparty credit risk
Current exposure method (CEM)
Standardised method (SM)
Standardized approach (counterparty credit risk) (SA-CCR)
Operational risk
Advanced measurement approach (AMA)
Basic indicator approach
Standardized approach (operational risk)
Standardised measurement approach (SMA)
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Further information: Financial risk management § Banking See also: Finance § Risk management, Investment banking § Risk management, and Treasury management § Banks

Banks, in their fundamental operations, are perpetually navigating a minefield of risks. How effectively these risks are identified, understood, and managed is not merely an academic exercise; it is a paramount driver of a bank's profitability and directly dictates the amount of capital it is legally mandated to hold. This "bank capital" primarily comprises equity (the ownership stake), retained earnings (profits kept within the business), and various forms of subordinated debt (debt that ranks lower than other debts in case of liquidation). It’s the buffer, the last line of defense against the inevitable chaos of the financial world.

Some of the primary risks that perpetually haunt banks include:

Credit risk: This is the classic and perhaps most fundamental risk—the potential for financial loss arising from a borrower's failure to uphold their payment obligations as promised. It's the risk that someone, somewhere, simply won't pay you back.
Liquidity risk: The insidious risk that a specific security or asset cannot be converted into cash quickly enough in the market to prevent a loss or, more importantly, to meet immediate financial obligations. It's the fear of having plenty of assets, but no ready cash when everyone comes knocking.
Market risk: The rather broad risk that the value of an entire portfolio, whether an investment portfolio held for long-term gains or a trading portfolio actively managed for short-term profits, will decline due to adverse movements in underlying market risk factors (like interest rates, exchange rates, or stock prices). It's the unpredictable whims of the market turning against you.
Operational risk: The often-overlooked risk arising from the internal workings of a company—failures stemming from inadequate or failed internal processes, people, and systems, or from external events. This could be anything from human error to system malfunctions to outright fraud.
Reputational risk: A particularly damaging, and increasingly potent, type of risk directly linked to the trustworthiness and public perception of the business. In an age of instant information, a damaged reputation can unravel years of careful cultivation, making this a surprisingly tangible threat.
Macroeconomic risk: These are the grand, sweeping risks related to the aggregate economy in which the bank operates. Think recessions, inflation spikes, or geopolitical instability—factors largely beyond any single bank's control, but profoundly impacting its operational environment.

To mitigate these inherent dangers, the capital requirement stands as a cornerstone of bank regulation. This framework dictates the minimum amount of capital a bank or depository institution must hold, guiding how it manages its balance sheet. The categorization of assets and capital is highly standardized, allowing for precise risk weighting to reflect their inherent volatility and potential for loss.

In the wake of the rather inconvenient 2008 financial crisis, regulators, in a moment of inspired desperation, compelled banks to issue Contingent convertible bonds (CoCos). These are hybrid capital securities, designed to absorb losses when the issuing bank's capital falls below a predefined threshold, as per their contractual terms. When triggered, this mechanism automatically reduces debt and provides a much-needed boost to the bank's capitalization. Due to their capacity to absorb losses in times of stress, CoCos hold the rather convenient potential to satisfy regulatory capital requirements, acting as a kind of financial emergency brake.

Banks in the Economy

The main building of SEB in Tallinn, [Estonia], symbolizing a financial anchor in the urban landscape.

Economic Functions

Banks, despite their often-maligned status, perform several critical economic functions that are, unfortunately, indispensable to the functioning of modern economies:

Issue of money: Banks, particularly in systems utilizing fractional-reserve banking, are instrumental in the creation and circulation of money. This occurs primarily in the form of banknotes (though central banks typically hold a monopoly on this) and, more significantly, through the creation of current accounts that are subject to check or payment at the customer's order. These claims on banks, being either negotiable or repayable on demand, are effectively valued at par and can circulate as money. They are transferable either by mere physical delivery, in the case of banknotes, or by the act of drawing a check that the payee can then deposit or cash. It's a system where trust, more than physical assets, underpins the value.
Netting and settlement of payments: Banks serve as both collection and paying agents for their vast customer bases. They participate in complex interbank clearing and settlement systems, meticulously collecting, presenting, receiving, and paying payment instruments. This intricate dance allows banks to operate with far fewer physical reserves than would otherwise be necessary, as inward and outward payments often offset each other. This netting process also efficiently balances payment flows between disparate geographical areas, significantly reducing the overall cost and logistical complexity of settlement across regions.
Credit quality improvement: Banks perform a crucial, if often invisible, role in transforming credit risk. They lend money to ordinary commercial and personal borrowers, who individually represent a certain level of "ordinary credit quality." However, banks themselves are generally considered high-quality borrowers in the financial markets. This improvement in credit quality stems from the bank's inherent diversification of its assets (spreading risk across many loans) and its substantial capital base, which acts as a buffer to absorb losses without defaulting on its own obligations. A critical caveat, however, is that banknotes and deposits held by individuals are typically unsecured. Should a bank encounter severe financial distress and be forced to pledge its assets as security to raise emergency funding, this effectively places note holders and depositors in an economically subordinated position, a fact often overlooked until a crisis hits.
Asset–liability mismatch / Maturity transformation: This is perhaps one of the most fundamental and simultaneously risky functions of banking. Banks fundamentally "borrow short and lend long." They take in money through demand deposits and short-term debt, which can be withdrawn relatively quickly, and use these funds to make longer-term loans, such as mortgages or business loans. Their ability to successfully execute this transformation, despite the inherent mismatch in maturities, rests on several pillars: a credit quality superior to most other borrowers, the aggregation of numerous issues (deposits) and redemptions (withdrawals), maintaining adequate cash reserves, investing in highly marketable securities that can be swiftly converted to cash, and the capacity to raise replacement funding from diverse sources (e.g., wholesale cash markets and securities markets) when needed. It’s a perpetual high-wire act.
Money creation/destruction: As previously noted, in a fractional-reserve banking system, every time a bank extends a loan, a new sum of money is, quite literally, created in the economy. Conversely, whenever the principal amount on that loan is repaid by the borrower, that same sum of money is, just as literally, destroyed. This constant ebb and flow of money creation and destruction, driven by bank lending, is a powerful, if often unacknowledged, force in shaping economic cycles.

Bank Crisis

The OTP Bank in Prešov, Slovakia, a seemingly stable facade that belies the inherent vulnerabilities of the banking system.

Banks, for all their sophisticated risk models and regulatory oversight, are inherently susceptible to a multitude of risks, which, with alarming regularity, have triggered systemic crises that ripple through entire economies. These vulnerabilities include: liquidity risk, the terrifying scenario where a sudden, widespread demand for withdrawals by depositors exceeds the bank's readily available funds (a classic "bank run"); credit risk, the ever-present danger that those who owe money to the bank will simply fail to repay it; and interest rate risk, the complex possibility that the bank will become unprofitable if rising interest rates force it to pay significantly more on its deposits than it receives on its outstanding loans.

Throughout history, bank crises have erupted with a certain predictable inevitability whenever one or more of these fundamental risks coalesce and amplify across the banking sector. Prominent examples of these financial cataclysms include the infamous bank run that gripped the United States during the Great Depression, a period of profound economic despair; the U.S. Savings and Loan crisis of the 1980s and early 1990s, a costly debacle rooted in deregulation and risky lending; the protracted Japanese banking crisis throughout the 1990s, a testament to the dangers of asset bubbles; and the more recent sub-prime mortgage crisis in the 2000s, which nearly brought the global financial system to its knees.

The 2023 global banking crisis serves as the latest, and by no means the last, chapter in this recurring narrative of financial fragility. In March 2023, a sudden confluence of liquidity shortages and looming bank insolvencies led to the rapid failure of three significant banks in the United States. Within a mere two weeks, the contagion spread, resulting in the failure or forced shutdown of several other major global banks by frantic regulators. It's a stark reminder that the lessons of history, particularly in finance, are often learned anew, and usually at great cost.

Size of Global Banking Industry

A look at the sheer scale of the global banking industry reveals a sector of immense, almost unfathomable, proportions. The total assets held by the largest 1,000 banks worldwide experienced a significant growth of 6.8% in the 2008–2009 financial year, reaching an unprecedented US $96.4 trillion. This expansion, however, was not indicative of robust health; rather, it occurred during adverse market conditions and was largely a consequence of recapitalization efforts—essentially, pumping more capital into struggling institutions. During the same period, profits plummeted by a staggering 85% to a mere US$ 115 billion, highlighting the severe stress on the industry.

Geographically, EU banks historically held the dominant share of these total assets, accounting for 56% in 2008–2009, though this was a slight decrease from 61% in the preceding year. Asian banks demonstrated a notable increase, with their share rising from 12% to 14% over the year, signaling a shift in global financial power. US banks also saw their share grow from 11% to 13%. In terms of revenue generated from global investment banking fees, 2009 saw a total of US$66.3 billion, an increase of 12% from the previous year, suggesting that even in downturns, the business of orchestrating deals remains lucrative.

The United States, with its unique regulatory structure and vast geography, boasts the highest number of banks globally in terms of individual institutions (a robust 5,330 as of 2015) and likely also in terms of physical branches (an expansive 81,607 as of 2015). This sprawling network reflects a system that historically favored a large number of smaller to medium-sized institutions, rather than a few monolithic giants. In stark contrast, as of November 2009, China's four largest banks alone commanded an impressive collective total exceeding 67,000 branches (ICBC: over 18,000; Bank of China: over 12,000; China Construction Bank: over 13,000; Agricultural Bank of China: over 24,000), supplemented by an additional 140 smaller banks whose branch counts were, at the time, undetermined but certainly substantial. Japan, for its part, operated with 129 banks and approximately 12,000 branches. In 2004, European nations like Germany, France, and Italy each maintained more than 30,000 branches, a figure that more than doubled the 15,000 branches found in the United Kingdom, illustrating the varying densities and accessibility of banking services across major economies.

Mergers and Acquisitions

Between 1985 and 2018, the banking sector, in its relentless pursuit of consolidation and scale, engaged in approximately 28,798 mergers or acquisitions, with banks acting as either the acquirer or the target company. The cumulative known value of these transactions, a staggering sum of financial maneuvering, reached roughly 5,169 billion USD. In terms of sheer transaction value, the industry experienced two distinct and significant waves of M&A activity: one peaking around 1999 and another in 2007. Both peaks saw transaction values soar to approximately 460 billion USD, only to be followed by a precipitous decline of 82% from 2007 until 2018, suggesting that even the allure of consolidation has its limits, or at least, its cyclical downturns.

Below is a concise list of the largest deals in history, measured by transaction value, that involved at least one bank. These are the titans of financial re-arrangement, reshaping the landscape of global banking with each strategic maneuver:

Date announced	Acquiring institution	Target institution	Value of transaction ($ millions)
Name	Mid clarification needed industry	Nation	Name
2007-04-25	RFS Holdings BV	Other financials	Netherlands
1998-04-06	Travelers Group Inc	Insurance	United States
2014-09-29	UBS AG	Banks	Switzerland
1998-04-13	NationsBank Corp, Charlotte, North Carolina	Banks	United States
2004-01-14	JPMorgan Chase & Co	Banks	United States
2003-10-27	Bank of America Corp	Banks	United States
2008-09-14	Bank of America Corp	Banks	United States
1999-10-13	Sumitomo Bank Ltd	Banks	Japan
2009-02-26	HM Treasury	National agency	United Kingdom
2005-02-18	Mitsubishi Tokyo Financial Group	Banks	Japan

Regulation

Main article: Banking regulation and supervision
See also: Basel Accords
Basel Framework
International regulatory standards for banks
Basel Committee on Banking Supervision
Basel Accords
Basel I
Basel II
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LCR
NSFR
FRTB
Final BIII Reforms
Background
Banking / Regulation and supervision
Monetary policy / Central bank
Risk / Risk management
Pillar 1: Regulatory capital
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Credit risk
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F-IRB
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Pillar 3: Market disclosure
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In the current financial landscape, commercial banks, those institutions that form the backbone of everyday commerce, are—perhaps predictably—heavily regulated in most jurisdictions. To even begin operations, they typically require a special bank license, a bureaucratic hurdle designed to ensure a modicum of stability and trustworthiness.

Usually, the legal definition of the "business of banking" for regulatory purposes is broadened beyond the common law understanding. It's extended to include the acceptance of deposits, even if those deposits are not immediately repayable to the customer's order. Interestingly, simply lending money, by itself, is generally not sufficient to fall under the strict regulatory definition of banking, highlighting the critical role of deposit-taking in the overall financial ecosystem.

Unlike most other heavily regulated industries, the regulator in banking is often a peculiar entity: typically also a direct participant in the market itself. This dual role is usually filled by a publicly or privately governed central bank. Central banks, in addition to their supervisory duties, generally hold a monopoly on the rather significant business of issuing banknotes, reinforcing their unique position. However, this isn't a universal truth. In the United Kingdom, for instance, while the Financial Services Authority (or its successors) licenses banks, some commercial banks (such as the venerable Bank of Scotland) retain the historical privilege of issuing their own banknotes, in addition to those issued by the Bank of England, which acts as the UK government's central bank. It's a charming anachronism in an otherwise tightly controlled system.

The imposing global headquarters of the Bank for International Settlements in Basel, a testament to the international coordination of banking regulation.

Banking law is fundamentally predicated on a detailed contractual analysis of the relationship that exists between the bank (as previously defined) and its customer. The "customer" here is broadly defined as any entity for whom the bank agrees to maintain an account. Into this relationship, the law, in its infinite wisdom, implies a series of rights and obligations that govern the delicate balance of trust and money:

The bank account balance is not merely a number; it represents the dynamic financial position between the bank and the customer. When the account is "in credit," the bank legally owes that balance to the customer. Conversely, when the account is "overdrawn," the customer is indebted to the bank. A simple concept, yet foundational.
The bank implicitly agrees to honor and pay the customer's checks up to the amount standing to the credit of the customer's account, plus any pre-approved overdraft limit. This is the core promise of transactional banking.
Crucially, the bank is generally prohibited from paying funds from the customer's account without a clear mandate from the customer, such as a check drawn by the customer or an authorized electronic instruction. This protects the customer's funds from unauthorized access.
The bank also agrees to promptly collect checks deposited into the customer's account, acting as the customer's agent, and to credit the proceeds to that account. It's a service that facilitates the flow of funds within the economy.
Furthermore, the bank typically possesses a right to combine the customer's accounts. This is because, from a legal perspective, each account is merely a different facet of the same overarching credit relationship between the bank and the individual or entity.
The bank holds a lien on checks deposited to the customer's account, specifically to the extent that the customer is indebted to the bank. This provides a measure of security for the bank in cases of outstanding obligations.
A cornerstone of banking trust is the principle that the bank must not disclose details of transactions conducted through the customer's account. This confidentiality is sacrosanct, unless the customer explicitly consents, there is a clear public duty to disclose (e.g., for national security), the bank's own legitimate interests require it (e.g., pursuing a debt), or the law explicitly demands it (e.g., a court order). It's a delicate balance between privacy and legal necessity.
Finally, the bank must not debank a customer without reasonable notice, as mandated by regulatory requirements. This prevents arbitrary termination of essential financial services, recognizing the profound impact such an action can have on an individual or business.

These implied contractual terms, while forming the bedrock of banking relationships, are not immutable. They can be, and often are, modified by explicit agreements negotiated directly between the customer and the bank. Additionally, the specific statutes and regulations in force within any given jurisdiction can further alter these terms, creating new rights, obligations, or limitations that are relevant to the intricate bank-customer relationship.

It's also worth noting that some types of financial institutions, such as building societies and credit unions, may be partly or wholly exempt from the stringent bank license requirements. Consequently, they are often regulated under separate, and sometimes less onerous, sets of rules, reflecting their distinct operational models and social purposes.

The requirements for obtaining a bank license, a prerequisite for entering this heavily controlled industry, naturally vary between jurisdictions but typically include a common set of demanding criteria:

Minimum capital: A substantial amount of initial capital is required to ensure the bank has a solid financial foundation and can absorb initial losses.
Minimum capital ratio: Beyond initial capital, banks must maintain a specific ratio of capital to their risk-weighted assets, a continuous measure of their financial resilience.
'Fit and Proper' requirements: Scrutiny is applied to the bank's controllers, owners, directors, and senior officers to ensure they possess the necessary integrity, competence, and financial soundness. This is an attempt, often imperfect, to prevent questionable characters from controlling vital financial institutions.
Approval of the bank's business plan: The proposed business strategy must be reviewed and approved as being sufficiently prudent and plausible, demonstrating a clear path to sustainable operation without undue risk.

Different Types of Banking

An illustration of the Northern National Bank, advertised in a 1921 book highlighting the opportunities available in Toledo, Ohio, showing the historical prominence of local banks.

The vast and multifaceted activities undertaken by banks can, for the sake of clarity, generally be compartmentalized into several distinct categories, each serving a different segment of the economic landscape:

Retail banking: This is the most visible and widely experienced form of banking, dealing directly with individual consumers and small businesses. It encompasses everyday services like checking accounts, savings accounts, mortgages, and personal loans—the financial plumbing of daily life.
Business banking: Stepping up in scale, this segment provides tailored financial services to mid-market businesses. It often involves more complex lending, cash management solutions, and advisory services designed to support the growth and operational needs of established enterprises.
Corporate banking: Directed at the largest business entities, multinational corporations, and institutions, corporate banking involves highly specialized services such as large-scale syndicated loans, complex treasury management, and sophisticated risk management solutions. It's where the truly massive financial transactions occur.
Private banking: A discreet and exclusive world, private banking offers comprehensive wealth management services to high-net-worth individuals and their families. This often includes investment management, estate planning, and bespoke financial advice, all delivered with a veneer of personalized service.
Investment banking: This segment operates primarily on the financial markets, focusing on activities such as underwriting securities, facilitating mergers and acquisitions, trading on behalf of clients and the bank itself, and providing strategic financial advice to corporations and governments. It's the high-octane, often volatile, side of banking.

While the vast majority of banks operate as profit-making private enterprises, driven by shareholder returns, it's worth noting that some are owned and operated by governments, often serving specific public policy objectives. Others function as nonprofits, prioritizing community service or social impact over pure financial gain, a refreshing, if rare, deviation from the norm.

Types of Banks

The National Bank of the Republic in Salt Lake City, 1908, an example of regional financial power. The BANK of Greenland in Nuuk, demonstrating banking's reach into remote territories. An office of Nordea bank in Mariehamn, Åland, illustrating a common European presence. An ATM for Al-Rajhi Bank, a ubiquitous symbol of modern banking convenience. The National Copper Bank in Salt Lake City, 1911, another historical institution.

The banking landscape is, much like a poorly organized filing cabinet, replete with various types of institutions, each with its specific niche and modus operandi:

Commercial banks: This term is often used to distinguish a "normal" bank, primarily engaged in deposit-taking and lending, from its more speculative cousin, the investment bank. Following the economic upheaval of the Great Depression, the U.S. Congress, in a moment of legislative clarity, mandated a separation: commercial banks were restricted to traditional banking activities, while investment banks were confined to capital market activities. While these two no longer have to be under separate ownership, the term "commercial bank" still frequently refers to a bank or a division of a bank that predominantly handles deposits and loans for corporations or other large businesses.
Community banks: These are locally operated financial institutions, often lauded for empowering their employees to make local decisions, thereby serving the specific needs of their immediate customers and partners. They pride themselves on a personal touch, a rare commodity in the sprawling financial world.
Community development banks: These are regulated banks with a specific social mission: to provide financial services and much-needed credit to under-served markets or populations. They aim to fill gaps left by larger, profit-driven institutions.
Land development banks: These specialized banks focus on providing long-term loans, primarily to promote the development of land, agriculture, and to boost agricultural production. Their history is quite extensive, with the first such bank established at Jhang in Punjab in 1920. They offer direct, long-term financing to members through their branch networks, a vital resource for rural economies.
Credit unions or co-operative banks: A refreshing anomaly in the profit-driven world, these are not-for-profit cooperatives owned by their depositors. They often manage to offer rates more favorable than their for-profit counterparts, a testament to their member-centric model. Typically, membership is restricted, often to employees of a particular company, residents of a defined geographical area, members of a specific union or religious organization, and their immediate families, fostering a sense of community.
Postal savings banks: These are savings banks historically, and sometimes still, associated with national postal systems. They leveraged existing widespread postal networks to provide accessible savings services to the general public, particularly in remote areas.
Private banks: These are banks that cater exclusively to the affluent, managing the substantial assets of high-net-worth individuals. Historically, a minimum of US $1 million was required to even open an account, a clear barrier to entry. However, in recent years, many private banks have, with a touch of calculated generosity, lowered their entry hurdles to around US$ 350,000 for private investors, perhaps realizing there's more wealth to be managed than initially assumed.
Offshore banks: These institutions are strategically located in jurisdictions characterized by low taxation and minimal regulation. Many offshore banks are, in essence, highly specialized private banks, offering discretion and favorable tax regimes to their wealthy clientele.
Savings banks: In Europe, savings banks boast deep historical roots, often tracing their origins back to the 19th, or even 18th, century. Their original, commendable objective was to provide easily accessible savings products to all strata of the population, a stark contrast to some more exclusive institutions. In some countries, these were established through public initiative; in others, socially committed individuals founded organizations to build the necessary infrastructure. Today, European savings banks largely maintain their focus on retail banking—payments, savings products, credits, and insurances for individuals or small and medium-sized enterprises. Beyond this retail focus, they distinguish themselves from commercial banks through their broadly decentralized distribution networks, providing extensive local and regional outreach, and by their often-touted socially responsible approach to business and society.
Ethical banks: These banks, a noble endeavor in a sometimes-cynical industry, prioritize the transparency of all their operations and commit to making only what they deem to be socially responsible investments. They aim to align financial activity with moral principles, a concept that can feel revolutionary.
A direct or internet-only bank: This is a banking operation that, in a bold move, entirely eschews physical bank branches. Transactions are typically conducted using ATMs and various electronic transfers, along with direct deposits managed through an online interface. It's banking stripped down to its digital essence.

Types of Investment Banks

Investment banks are the architects of large-scale financial transactions. They "underwrite" (essentially guarantee the sale of) new stock and bond issues for corporations and governments, provide sophisticated investment management services, and advise corporations on complex capital market activities such as mergers and acquisitions (M&A). Beyond advisory roles, they actively trade for their own accounts, make markets in securities, and provide a range of securities services to institutional clients, operating at the nexus of corporate finance and global markets.
Merchant banks, in their traditional sense, were historically engaged in trade finance, facilitating international commerce through various financial instruments. The modern definition, however, has evolved: it now typically refers to banks that provide capital to firms in the form of equity (shares) rather than traditional loans. Unlike pure venture capital firms, merchant banks tend to focus their investments on more established companies rather than nascent startups, seeking growth in mature businesses.

Combination Banks

A Banco do Brasil office in São Paulo, Brazil. This institution, the largest financial entity in Brazil and Latin America, exemplifies the scale of universal banking.

Universal banks, more commonly known as comprehensive financial services companies, are the behemoths of the industry. They engage in several, often all, of the aforementioned banking activities, offering a vast array of services under one corporate umbrella. These highly diversified groups frequently extend their reach even further, distributing insurance products. This integration has given rise to the rather clunky, yet descriptive, term "bancassurance," a portmanteau word combining "banque" (French for bank) and "assurance," signifying that both banking and insurance services are seamlessly provided by the same corporate entity. It’s the epitome of financial "one-stop shopping," for better or worse.

Other Types of Banks

Central banks are not typical commercial entities; they are normally government-owned institutions, entrusted with quasi-regulatory responsibilities that transcend mere profit-seeking. Their mandate includes supervising commercial banks to ensure stability, and, critically, controlling the benchmark cash interest rate to manage monetary policy. They serve as the ultimate providers of liquidity to the banking system and, in times of severe financial distress, act as the indispensable lender of last resort, preventing systemic collapse. They are the silent, often unappreciated, guardians of financial order.
Islamic banks operate under a unique framework, meticulously adhering to the concepts and principles of Islamic law. This distinct form of banking revolves around several well-established tenets, chief among them the absolute avoidance of riba, or interest, a concept explicitly forbidden in Islam. Instead, Islamic banks generate profit (often through a markup on goods or services) and charge fees on the financing facilities they extend to customers, structuring transactions to comply with ethical and religious guidelines. It's a system built on shared risk and ethical investment, a fascinating alternative to conventional banking.

Challenges Within the Banking Industry

The examples and perspective in this section may not represent a worldwide view of the subject. One might consider improving this section, discussing the issue on the talk page, or creating a new section, as appropriate. (September 2009) ( Learn how and when to remove this message )

United States

Main article: Banking in the United States

The iconic Citibank building, formerly The People's Trust Company Building, in Brooklyn, New York City, stands as a monument to the enduring, yet challenged, banking presence.

The banking industry in the United States is, to put it mildly, one of the most heavily regulated and diligently guarded in the world. This is not a simple system; it is a sprawling, multi-layered edifice, policed by a multitude of specialized and narrowly focused regulators. For instance, all banks holding FDIC-insured deposits are, by definition, under the watchful eye of the Federal Deposit Insurance Corporation (FDIC). However, when it comes to "soundness examinations"—assessments of whether a bank is operating in a safe and prudent manner—the landscape becomes more fragmented. The Federal Reserve serves as the primary federal regulator for state-chartered banks that are members of the Federal Reserve System. The Office of the Comptroller of the Currency (OCC), on the other hand, takes primary federal oversight for national banks. State non-member banks find themselves examined by both state agencies and the FDIC, creating a complex web of oversight. National banks, mercifully, have a single primary federal regulator: the OCC.

Each of these regulatory agencies operates under its own distinct set of rules and regulations, to which banks and thrifts must meticulously adhere. In an attempt to bring some semblance of order to this regulatory labyrinth, the Federal Financial Institutions Examination Council (FFIEC) was established in 1979. This formal inter-agency body was empowered to prescribe uniform principles, standards, and reporting forms for the federal examination of financial institutions. While the FFIEC has undeniably fostered a greater degree of regulatory consistency, the rules and regulations themselves are in a state of perpetual flux, constantly evolving and adapting, often in response to the latest crisis.

Beyond the ever-shifting regulatory landscape, significant changes within the industry itself have led to extensive consolidations across the various federal agencies—the Federal Reserve, FDIC, OTS, and OCC. Offices have been shuttered, supervisory regions merged, staff levels reduced, and budgets trimmed. The remaining regulators, those tasked with maintaining order, now face an increased burden: an expanded workload and a greater number of banks per regulator. While banks themselves struggle to keep pace with the dizzying changes in the regulatory environment, the regulators, in turn, grapple with managing their workload and effectively overseeing their assigned institutions. The palpable impact of these changes is a reduction in the hands-on assessment of banks, less time dedicated to each institution, and, consequently, an increased potential for problems to slip through the cracks, potentially culminating in an overall rise in bank failures across the United States. It's a system teetering on the edge of its own capacity.

The dynamic and often unpredictable economic environment also exerts a profound influence on banks and thrifts. They are locked in a perpetual struggle to effectively manage their interest rate spread—the difference between what they pay for deposits and what they earn on loans—in the face of persistently low rates on loans, fierce rate competition for deposits, and the broader, often turbulent, market changes, industry trends, and economic fluctuations. Formulating effective growth strategies has become an increasingly daunting challenge for banks in the recent economic climate. While a rising interest rate environment might seem beneficial to financial institutions, the precise impact of such changes on consumers and businesses is inherently unpredictable. The core challenge for banks remains to achieve growth while skillfully managing this spread, ultimately to generate a satisfactory return for their shareholders.

The management of banks' asset portfolios, particularly the quality of their loans, remains a perennial challenge in today's economic environment. Loans constitute a bank's primary asset category, and when the quality of these loans becomes suspect, the very foundation of a bank is shaken to its core. While asset quality has always been a critical concern, declining asset quality has escalated into a significant, widespread problem for financial institutions.

The Safra National Bank in New York, a beacon of private banking amidst global challenges.

Several factors contribute to this deteriorating asset quality. One, perhaps ironically, is the lax attitude some banks adopted during years of perceived "good times," leading to less stringent lending standards. This potential for oversight is exacerbated by the aforementioned reduction in regulatory scrutiny and, in some cases, a thinning of experienced management layers. Consequently, problems are more likely to remain undetected for longer periods, resulting in a far more significant, and often catastrophic, impact on the bank when they are finally discovered. Moreover, banks, like any business, are under constant pressure to cut costs and have, in some instances, unwisely eliminated essential expenses such as adequate employee training programs, further compromising their operational resilience.

Banks also contend with a host of other structural challenges. Many institutions face an aging ownership group, with management teams and boards of directors across the country reaching retirement age, raising questions about succession and future leadership. There's also the relentless, unyielding pressure from shareholders, both public and private, to meet ambitious earnings and growth projections, often pushing institutions to take on greater risk. Regulators, in turn, impose additional pressure on banks to meticulously manage various categories of risk, creating a constant tension between growth and prudence. Furthermore, banking is an intensely competitive industry. The financial services landscape has become increasingly crowded and cutthroat with the entry of diverse players, including insurance agencies, credit unions, check cashing services, and credit card companies, all vying for a share of the consumer's wallet.

In response to these multifaceted pressures, banks have increasingly diversified their activities into sophisticated financial instruments, particularly through extensive operations in financial markets such as brokerage. This strategic shift has seen them transform into major players in these activities, seeking new avenues for revenue generation and risk diversification.

Another significant, and often overlooked, challenge is the pervasive issue of aging infrastructure, often referred to as "legacy IT." Many backend systems supporting banking operations were built decades ago and are notoriously incompatible with new applications and modern digital demands. The process of fixing bugs, maintaining these antiquated systems, and attempting to create interfaces with contemporary technologies demands colossal sums of money, compounded by the increasing scarcity of programmers with the specialized knowledge to navigate these complex, outdated architectures. It's a digital millstone around the industry's neck.

Loan Activities of Banks

To fulfill their crucial role in providing the necessary funds for home buyers and builders, banks must engage in relentless competition for deposits. This competition is intensified by the phenomenon known as disintermediation, a trend that has seen dollars moving away from traditional savings accounts and directly into more appealing market instruments. These include relatively secure options like U.S. Department of Treasury obligations and agency securities, as well as various forms of corporate debt, which often offer higher returns. One of the most significant factors driving this movement of deposits in recent years has been the tremendous growth and allure of money market funds, whose comparatively higher interest rates have consistently attracted consumer deposits away from conventional bank offerings.

In a concerted effort to compete for these elusive deposits, US savings institutions have developed and offer a diverse array of savings plans, each designed to appeal to different customer needs and risk appetites:

Passbook or ordinary deposit accounts: These are the simplest forms, permitting any amount to be added to or withdrawn from the account at any time. They offer maximum flexibility but typically minimal interest.
NOW and Super NOW accounts: These accounts function much like traditional checking accounts but come with the added incentive of earning interest. Super NOW accounts may require a higher minimum balance, catering to those with larger sums to deposit.
Money market accounts: These accounts typically offer higher interest rates than standard savings accounts but often carry a monthly limit on preauthorized transfers to other accounts or persons. They also frequently require a minimum or average balance, appealing to savers with larger, less frequently accessed funds.
Certificate accounts: These accounts commit funds for a specified period (e.g., a Certificate of Deposit). Savers agree to a fixed term, and early withdrawals are subject to the loss of some or all of the accrued interest, incentivizing long-term commitment.
Notice accounts: These are the functional equivalent of certificate accounts but with an indefinite term. Savers agree to notify the institution a specified time in advance before making a withdrawal, providing the bank with predictable liquidity management.
Individual retirement accounts (IRAs) and Keogh plans: These are specialized forms of retirement savings vehicles where the funds deposited and the interest earned are exempt from income tax until after withdrawal, offering significant tax advantages for long-term planning.
Checking accounts: While traditionally the domain of commercial banks, some savings institutions now offer checking accounts, often under specific restrictions, to provide a more comprehensive banking solution.
It is a fundamental principle that all withdrawals and deposits are entirely the sole decision and responsibility of the account owner, unless a parent or guardian is legally mandated to act otherwise.
Club accounts and other savings accounts: These are often highly structured accounts designed to encourage regular saving habits, helping individuals accumulate funds to meet specific financial goals, such as holiday spending or future purchases.

Investment for the Fossil Fuel Industry

Even in the post-Paris Agreement era, an alarming trend persists: large banks in developed countries such as the U.S. and Japan continue to provide substantial financing to the fossil fuel industry. This practice, despite growing awareness of climate change and international commitments to reduce emissions, has drawn widespread condemnation from environmental groups and activists, who argue it directly undermines global climate action efforts. Critics deem such continued investment as "delusional," arguing that it actively contributes to climate chaos by enabling the expansion and continued operation of industries that are fundamentally at odds with sustainability goals. The financial sector's role in perpetuating fossil fuel dependence remains a contentious and critical issue in the broader fight against climate change.

Types of Accounts

A typical suburban bank branch, a common sight in many communities.

Bank statements are, at their core, meticulously compiled accounting records produced by banks, adhering to the various accounting standards prevalent across the globe. Under Generally Accepted Accounting Principles (GAAP), all accounts are categorized into two fundamental types: debit and credit. Credit accounts encompass Revenue, Equity, and Liabilities, while Debit Accounts include Assets and Expenses. To increase the balance of a credit account, the bank credits it; to decrease it, the bank debits it. This can often be a source of confusion for the uninitiated.

From the customer's perspective, the logic is perhaps more intuitive: a customer debits their savings/bank (an asset from their perspective) in their personal ledger when making a deposit (and the account is normally in debit on their books). Conversely, the customer credits a credit card (a liability) account in their ledger every time they spend money (and that account is normally in credit on their books). When a customer reviews their bank statement, the statement will reflect a credit to the account for deposits made, and debits for withdrawals of funds. A customer with a positive balance will see this balance clearly reflected as a credit balance on their bank statement. If, however, the customer has overdrawn their account, they will have a negative balance, which is reflected as a debit balance on the bank statement. It’s a matter of perspective, and often, a matter of how much you owe.

Brokered Deposits

One particularly intriguing, and sometimes perilous, source of deposits for banks comes from deposit brokers. These intermediaries deposit vast sums of money on behalf of various investors, often channeling these funds through trust corporations. This "brokered money" tends to gravitate towards banks that offer the most favorable terms, which frequently surpass those offered to local, individual depositors. It's entirely possible, and sometimes observed, for a bank to operate with virtually no local deposits whatsoever, relying almost exclusively on these brokered funds.

However, accepting a significant quantity of such deposits—sometimes rather unflatteringly termed "hot money" due to its transient nature—places a bank in a precarious and inherently risky position. These funds demand a high interest rate, meaning the bank must then lend or invest this money in a manner that yields a return sufficient to cover these elevated interest payments. This pressure can, predictably, lead to riskier investment decisions and, in unfortunate scenarios, even contribute to the eventual failure of the bank. A stark illustration of this danger was seen during the 2008 financial crisis in the United States, where banks that ultimately failed had, on average, four times more brokered deposits as a percentage of their total deposits compared to the average solvent bank. This volatile combination of brokered deposits and speculative real estate investments also played a significant role in the devastating savings and loan crisis of the 1980s. Despite these historical warnings, the regulation of brokered deposits often faces strong opposition from banks, which argue that the practice is a vital source of external funding for growing communities that simply lack sufficient local deposits to meet their capital needs. It’s a classic tension between risk and opportunity.

Beyond these specific categories, there are broadly different types of accounts available: savings accounts, designed for accumulation; recurring deposit accounts, for systematic saving; and current accounts, for daily transactional convenience.

Custodial Accounts

Custodial accounts are a distinct category of accounts in which assets are held by one party (the custodian) on behalf of a third party (the beneficiary). For example, businesses that temporarily accept custody of funds for clients—perhaps prior to their conversion into another currency, their return to the client, or their transfer to another entity—will typically maintain a designated custodial account at a bank specifically for these purposes. This ensures the segregation and proper handling of client funds, a crucial element of trust in financial services.

Globalization

In modern times, the banking industry has witnessed substantial, if not entirely complete, reductions in the traditional barriers to global competition. The relentless march of technological progress, particularly in telecommunications and other sophisticated financial technologies like the Bloomberg Terminal, has empowered banks to dramatically extend their operational reach across the globe. They are no longer tethered by geography, as they can now manage both client finances and inherent risks from virtually any location, without needing to be physically proximate to their customers. This surge in cross-border activities has, in turn, fueled an increased demand for banks capable of providing a diverse range of services across national boundaries to clients of various nationalities.

However, despite these undeniable reductions in barriers and the proliferation of cross-border financial activity, the banking industry remains, somewhat stubbornly, far from being as truly globalized as many other sectors. In the United States, for instance, surprisingly few banks are overly concerned with the implications of the Riegle–Neal Act, legislation designed to promote more efficient interstate banking. This suggests a persistent domestic focus. Across the vast majority of nations worldwide, the market share commanded by foreign-owned banks typically constitutes less than a tenth of the total market share for banks within that particular nation.

One significant reason for this incomplete globalization is the enduring convenience, and often necessity, of having local banks to provide loans to small businesses and individual consumers. These transactions often require localized knowledge, personal relationships, and an understanding of specific regional market conditions that larger, more distant global institutions struggle to replicate. For large corporations, however, the nationality or physical location of their bank is considerably less critical, as their complex financial information and operational needs are readily accessible and manageable across global networks.

There have been at least two notable, and ultimately rather instructive, attempts to overcome the banking industry's entrenched national focus and achieve truly global retail banking prominence. In the 1980s, both Citigroup and HSBC embarked on ambitious strategies to develop extensive networks of retail bank branches in numerous countries around the world, aiming to establish themselves as universally recognized global consumer banking brands. However, these grand visions encountered predictable friction with reality. In 2021, Citigroup initiated a strategic exit from its retail banking operations outside of its core U.S. market, acknowledging the difficulties. Similarly, in 2022, HSBC commenced its withdrawal from the U.S. retail market (with the notable exception of its wealth management business), and by 2023, it had placed its retail operations in a dozen other countries under review for sale or closure. According to analysts at Wells Fargo, both banks operated under the flawed assumption that globalization would inevitably lead to the rise of vast numbers of "global consumers" who would regularly travel across borders for both work and leisure, requiring banking services that spanned continents. The sharp, and rather inconvenient, truth, as Wells Fargo succinctly observed, was that "that global consumer customer never materialized." A testament to grand plans often failing to account for the messy reality of human behavior.

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