A bank is a financial institution that provides banking and other financial
services. By the term bank is generally understood an institution that holds
a banking license. Banking licenses are granted by financial supervision
authorities and provides rights to conduct the most fundamental banking
services such as accepting deposits and making loans. There are also
financial institutions that provides certain banking services without
meeting the legal definition of a bank, a so called Non-bank.
The word bank is derived from the Italian banca, which means bench. The
terms bankrupt and "broke" are similarly derived from banca rotta, which
refers to an out of business bank, having its bench physically broken. Money
lenders in Northern Italy originally did business in open areas, or big open
rooms, with each lender working from his own bench or table.
Banks are prone to crisis
The traditional bank has an inherent tendency to crisis. This is because the
bank borrows short term and lends leveraged long term. The sum of deposits
and the banks capital will never equal more than a modest percentage of the
loans the bank has outstanding.
Even if liquidity is not a concern, if there is no run on the bank, banks
can simply choose a bad portfolio of loans, and lose more money then they
have. The US Savings and Loan Crisis in the early 1990s is such an incedent.
Banks have a unique role in the monetary transmission mechanism
When a bank takes a deposit for $1 and then lends $5, where do the other $4
come from? The answer, which astonishes most people when they realize it, is
that the bank is allowed to make it up. This is the central issue of
monatary policy. Instead of printing money, this mechanism of how much extra
a bank can lend is the central way of controlling how much money there is
Banks should be well regulated
The combination of the instability of banks as well as their important
facilitating role in the economy lead to banking being thoroughly regulated.
The amount of capital a bank is required to hold is a function of the amount
and quality of the loans outstanding. Major banks are subject to the Basel
Capital Accord proglemated by the Bank for International Settlements. In
addition, banks are usually required to purchase deposit insurance to make
sure smaller investors are not wiped out in the event of a bank failure.
Another reason banks are thoroughly regulated is that ultimately, no
government can allow the banking system to fail. There is almost always a
lender of last resort - in the event of a liquidity crisis (where short term
obligations exceed short term assets) some element of government will step
in to lend banks enough money to avoid bankruptcy.
Banks are fat-cat villains
Banks have a long history of being characterized as heartless, rapacious
creditors, hounding honest folk down on their luck for the last dime. This
reputation is by no means undeserved. See Populism.
Banks make a lot of money
Banks in the United States are by far the most profitable corporations there
are, especially relative to the small market shares they have. This amount
is even higher if one counts the credit divisions of companies like Ford,
which are responsible for a large amount of those companies profits. For
example, the largest bank, Citigroup, which for the past 3 years has made
more profit then any other company in the world, only has a 5 percent market
share. Now if Citigroup were to be as dominant in its industry as a Home
Depot, Starbucks, or Wal Mart in their respective industries, with a 30
percent market share, it would make more money then the top ten non-banking
US industries combined. In the past 10 years in the United States, banks
have taken many measures to ensure their profitability dominance. Firstly
this includes the Gram-Leach-Biley Act, which allows banks again to merge
with investment and insurance houses. This allows them to make profit no
matter what the economy is like, because people will almost always put their
money in one of those 3 options. Secondly, they have introduced risk based
pricing on loans, which means charging higher interest rates for those
people who they deem more risky to default on loans. This dramatically helps
to offset the losses from bad loans. Thirdly, they are by far the main
method of payment processing. Since there has been no government issued
smart cards, which would be the equivalent of cash, bank debit, check, and
credit card use has been the main method of exchanging money. This allows
banks to essentially tax all movement of money, and the movement of money is
essentially independant of the state of the economy. The banks main obstacle
to making more money is new government regulation.
There several different types of banks. For example
* Central banks usually control monetary policy and may be the lender of
last resort in the event of a crisis
* Investment banks underwrite stock and bond issues and advise on mergers
* Merchant banks engage in trade financing
* Savings banks write mortgages exclusively
* Commercial banks are otherwise undistinguished
Bank can also refer to the area of London close to the Bank of England, and
to Bank tube station.