Banking & Banks
The history of banking began with the first prototype banks which were the merchants
of the world, who gave grain loans to farmers and traders who carried goods between cities.
This was around 2000 BC in Assyria, India and Sumeria. Later, in ancient Greece and during
the Roman Empire, lenders based in temples gave loans, while accepting deposits and
performing the change of money. Archaeology from this period in ancient China and India
also shows evidence of money lending.
Many histories position the crucial historical development of a banking system to
medieval and Renaissance Italy and particularly the affluent cities of Florence, Venice and
Genoa. The Bardi and Peruzzi Families dominated banking in 14th century Florence,
establishing branches in many other parts of Europe. The most famous Italian bank was the
Medici Bank, established by Giovanni Medici in 1397. The oldest bank still in existence is
Banca Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating
continuously since 1472. Until the end of 2019, the oldest bank still in operation was the
Banco di Napoli headquartered in Naples, Italy which had been operating since 1463.
Development of banking spread from northern Italy throughout the Holy Roman
Empire, and in the 15th and 16th century to northern Europe. This was followed by a number
of important innovations that took place in Amsterdam during the Dutch Republic in the 17th
century, and in London since the 18th century. During the 20th century, developments in
telecommunications and computing caused major changes to banks' operations and let banks
dramatically increase in size and geographic spread.
What is banking and how does it work? Banking is an industry that handles cash,
credit, and other financial transactions. Banks provide a safe place to store extra cash and
credit. They offer savings accounts, certificates of deposit, and checking accounts. Banks use
these deposits to make loans. These loans include home mortgages, business loans, and car
loans.
Banking is defined as the business activity of accepting and safeguarding money
owned by other individuals and entities, and then lending out this money in order to conduct
economic activities such as making profit or simply covering operating expenses.
Banking is one of the key drivers of the economy. It provides the liquidity needed for
families and businesses to invest in the future. Bank loans and credit mean families don't
have to save up before going to college or buying a house. Companies use loans to start
hiring immediately to build for future demand and expansion.
A bank is a financial institution licensed to receive deposits and make loans. Banks
are currently not required to keep any percentage of each deposit on hand. They make money
by charging higher interest rates on their loans than they pay for deposits.
Banks perform a myriad of functions, including deposits and withdrawals, currency
exchange, forex trading, and wealth management. Also, they act as a link between depositors
and borrowers, and they use the funds deposited by their customers to provide credit facilities
to people who want to borrow.
Banks make money by charging an interest rate on loans, where they profit by
charging a higher interest rate than the interest rate they pay on customer deposits. However,
they must comply with the regulations set by the central bank or national government.
Banks perform a variety of operations ranging from basic or primary functions like
day to day transactions at a branch to others that may be the agency or general utility services
in nature. The transactions that are incidental to revenue/sales or sustaining the business are
an important element of the banking industry value chain.
Banks perform a variety of transactions and activities to support their banking
business. These transactions may include making or accepting payments, trading, clearing
and settlement of accounts, and custody. Knowing the operational aspects of banking is very
important for understanding the value chain of the banking industry. The most important
supporting activities performed by banking institutions are: Acceptance of Deposits, Lending
of Funds, Clearing of Cheques, Remittance of Funds, Lockers & Safe Deposits, Bill Payment
Services, Online Banking, Credit & Debit Cards, Overseas Banking Services, Wealth
Management, Investment Banking, Social Objectives.
Banks can be placed into certain categories. Two of the most common types of banks
are retail and investment banks. Depending on type, a bank may also provide various
financial services ranging from providing safe deposit boxes and currency exchange to
retirement and wealth management.
In terms of banks, the central bank is the most important. Central banks manage the
money supply in a single country or a series of nations. They supervise commercial banks, set
interest rates and control the flow of currency.
Central banks also implement a government’s monetary policy goals, whether that
involves combating deflation or keeping prices from fluctuating. If necessary, they can lend
money in rough economic times to keep the monetary system from collapsing. In the United
States, the Federal Reserve System is the central bank. The European Central Bank regulates
economic activity for the 19 countries in the eurozone.
Retail banking provides financial services for individuals and families. The three most
important functions are credit, deposit, and money management.
First, retail banks offer consumers credit to purchase homes, cars, and furniture. These
include mortgages, auto loans, and credit cards. The resulting consumer spending drives
almost 70% of the U.S. economy. They provide extra liquidity to the economy this way.
Credit allows people to spend future earnings now.
Second, retail banks provide a safe place for people to deposit their money. Savings
accounts, certificates of deposit, and other financial products offer a better rate of return
compared to stuffing their money under a mattress. Banks base their interest rates on the fed
funds rate and Treasury bond interest rates. These rise and fall over time. The Federal
Deposit Insurance Corporation insures most of these deposits.Third, retail banks allow the
customer to manage money with checking accounts and debit cards. You don't have to do all
your transactions with dollar bills and coins. All of this can be done online, making banking
an added convenience.
Retail banks use the depositors' funds to make loans. To make a profit, banks charge
higher interest rates on loans than they pay on deposits.
An investment bank is a financial services company that acts as an intermediary in
large and complex financial transactions. An investment bank is usually involved when a
startup company prepares for its launch of an initial public offering and when a corporation
merges with a competitor. It also has a role as a broker or financial adviser for large
institutional clients such as pension funds. Investment bank clients include corporations,
pension funds, other financial institutions, governments, and hedge funds.
Investment banks are best known for their work as intermediaries between a
corporation and the financial markets. That is, they help corporations issue shares of stock in
an initial public offering or an additional stock offering. They also arrange debt financing for
corporations by finding large-scale investors for corporate bonds.
The investment bank is responsible for examining a company’s financial statements
for accuracy and publishing a prospectus that describes the offering in detail to investors
before the securities are available for purchase.
Another type of banks are Commercial banks. They provide services to private
individuals and businesses. Commercial banks tend to concentrate on supporting businesses.
Both large corporations and small businesses can turn to commercial banks if they need to
open a checking or savings account, borrow money, get access to credit or transfer funds to
companies in foreign markets.
The shadow banking system consists of financial groups that aren’t bound by the
same strict rules and regulations that other banks have to comply with. Much like the
standard regulated banks, shadow banks deal with credit and different kinds of assets. But
they get their funding by borrowing it, connecting with investors or making their own funds
instead of using money issued by the central bank.
Community banks that are smaller than commercial banks. They concentrate on the
local market. They provide more personalized service and build relationships with their
customers.
Savings and loans are specialized banking entities, created to promote affordable
home ownership. Often these banks will offer a higher interest rate to depositors as they raise
money to lend for mortgages.
There is also internet banking that provides services via the world wide web. The
sector is also called E-banking, online banking, and net banking. Most other banks now offer
online services. There are many online-only banks. Since they have no branches, they can
pass cost savings onto the consumer.
Before the introduction of the modernized banking system, people used to save their
money in hard cash. They stored this cash in lockers, underground, with the grains, etc. There
were so many instances when the money got stolen, eaten by the rats or simply rot through
the years. Technology radically transformed society through technological development.
Each generation of technology improved over the last and the rate of progress from version to
version speeds up. On the strength of this, modern day banking is a lot more defined and
regulated.
According to the survey by the World Economic Forum, Canada has the world’s best
banking system. It is followed by Sweden, Luxembourg and Australia. Canada received 6.8
out of total 7 points and topped the list. The United States has fallen down to 40th place.
According to Global Finance magazine, the world's safest bank is KfW in Germany,
followed by Zuercher Kantonalbank in Switzerland and Landwirtschaftliche Rentenbank in
Germany.
According to Bankers Almanac, the largest bank in the world based on assets is the
Commercial Bank of China, followed by The China Construction Bank Corporation and the
Agricultural Bank of China, another Chinese bank that ranks third largest in the world.
Banks around the world played a crucial hand in keeping the global economy moving.
But not all banks serve the same purpose. There are many types of financial institutions and
each one affects the market in a unique way.
To conclude, a well-functioning financial system is fundamental to a modern
economy, and banks perform important functions for society. Banks play an important role in
the economy by offering a service for people wishing to save. Banks also play an important
role in offering finance to businesses who wish to invest and expand. These loans and
business investments are important for enabling economic growth.
References
1. “Banking Operations: Understanding Various Transactions & Activities”,
Technofunc,
www.technofunc.com/index.php/domain-knowledge/banking-domain/item/banking-
operations
2. “What is banking and why is it important?”, PenState,
psu.instructure.com/courses/1806581/pages/introduction-what-is-banking-and-why-
is-it-important?module_item_id=26004136
3. Kimberly Amadeo, Reviewed by Eric Estevez, “Retail Banking, Its Types and
Economic Impact”, the balance, November 30, 2020, www.thebalance.com/what-is-
retail-banking-3305885
4. “Banking Basics: 5 Types of Bank Accounts”, OppU, April 8, 2021,
www.opploans.com/oppu/articles/banking-basics-bank-accounts/
5. Eric Rosenberg, Reviewed by Eric Estevez, “Best Banks”, the balance, May, 8, 2021,
www.thebalance.com/best-banks-4165386
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www.investopedia.com/terms/b/bank.asp
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Investopedia, May 25, 2020, www.investopedia.com/ask/answers/061615/whats-
difference-between-investment-banks-and-commercial-banks.asp
8. Nathan Reiff, Reviewed by Margaret James, “10 Biggest Banks in the World”,
Investopedia, January 12, 2021,
www.investopedia.com/articles/investing/122315/worlds-top-10-banks-jpm-wfc.asp
9. Marshall Hargrave, Reviewed by Michael J. Boyle, “Investment Bank”, Investopedia,
October 23, 2020, www.investopedia.com/terms/i/investmentbank.asp
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February 21, 2021, www.investopedia.com/terms/c/commercialbank.asp
