BANK

an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged, respectively. Some banks also have the power to create money. The principal types of banking in the modern industrial world are commercial banking and central banking. A commercial banker is a dealer in money and in substitutes for money, such as checks or bills of exchange. The banker also provides a variety of other financial services. The basis of the banking business is borrowing from individuals, firms, and occasionally governmentsi.e., receiving deposits from them. With these resources and also with the bank's own capital, the banker makes loans or extends credit and also invests in securities. The banker makes profit by borrowing at one rate of interest and lending at a higher rate and by charging commissions for services rendered. A bank must always have cash balances on hand in order to pay its depositors upon demand or when the amounts credited to them become due. It must also keep a proportion of its assets in forms that can readily be converted into cash. Only in this way can confidence in the banking system be maintained. Provided it honours its promises (e.g., to provide cash in exchange for deposit balances), a bank can create credit for use by its customers by issuing additional notes or by making new loans, which in their turn become new deposits. The amount of credit it extends may considerably exceed the sums available to it in cash. But a bank is able to do this only as long as the public believes the bank can and will honour its obligations, which are then accepted at face value and circulate as money. So long as they remain outstanding, these promises or obligations constitute claims against that bank and can be transferred by means of checks or other negotiable instruments from one party to another. These are the essentials of deposit banking as practiced throughout the world today, with the partial exception of socialist-type institutions. Another type of banking is carried on by central banks, bankers to governments and lenders of last resort to commercial banks and other financial institutions. They are often responsible for formulating and implementing monetary and credit policies, usually in cooperation with the government. In some casese.g., the U.S. Federal Reserve Systemthey have been established specifically to lead or regulate the banking system; in other casese.g., the Bank of Englandthey have come to perform these functions through a process of evolution. Some institutions often called banks, such as finance companies, savings banks, investment banks, trust companies, and home-loan banks, do not perform the banking functions described above and are best classified as financial intermediaries. Their economic function is that of channelling savings from private individuals into the hands of those who will use them, in the form of loans for building purposes or for the purchase of capital assets. These financial intermediaries cannot, however, create money (i.e., credit) as the commercial banks do; they can lend no more than savers place with them. This article describes the development of banking functions and institutions, the basic principles of modern banking practice, and the structure of a number of important national banking systems. Certain concepts not addressed here that are nonetheless fundamental to banking are treated in the articles accounting and money. rocky or sandy submerged elevation of the seafloor with a summit less than 200 m (650 feet) below the surface but not so high as to endanger navigation. Many banks are local prominences on continental or island shelves. Similar elevations with tops more than 200 m below the surface are called oceanic plateaus. Banks whose tops rise close enough to the sea surface to be hazardous to shipping are called shoals. Some banks provide favourable conditions for marine life and are therefore important fishing groundse.g., the Grand Banks of Newfoundland. an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged, respectively. They also have the power to create money. The two major classes of banks are commercial and central banks. Commercial banks accept savings and checking deposits, make loans and other investments, and offer financial services that facilitate the exchange of funds among individuals and institutions. In addition to the profit derived from the interest spread, banks charge fees for various services. Central banks act as bankers to governments, as the agents and frequently the designers of monetary and credit policies, and as lenders of last resort to commercial banks in the case of a financial crisis. In addition to their essential technical activities, central banks play a significant psychological role as guarantors of the monetary system, supported by government bank insurance. Central banks frequently make healthy profits for governments through fees and security transactions. Early banks only verified coinage or exchanged one jurisdiction's coins for another's. As trade routes extended in the early Renaissance, bankers devised means for their agents to make payments at a distance (at exchange rates profitable to the banker), without physically transferring any coins. Early banks accepted deposits of money or valuables for safekeeping. By the 17th century, London bankers had developed a system with most of the essentials of modern banking. They dealt in foreign exchange, paid interest to attract coin deposits, and, discovering that only a fraction of depositors would demand their cash at any one time, loaned the balance at interest. It became common for individuals and firms to exchange funds through bankers with written draftsthe origin of the modern check. Banks offered loans by granting overdraft privileges to checkwriters and by issuing bank notes. Both methods of extending credit had the practical effect of increasing the supply of money. Central banks eventually supplanted commercial banks as issuers of notes and currency in most countries. The United States and Great Britain represent the extremes of national banking practice. The system in the U.S. is called unit banking; the British system, branch banking. The haphazard settling of the U.S. frontier, combined with a hostility toward concentrated financial power, led to a proliferation of local banks. For large and complex transactions, country banks came to depend on correspondent city banks. Although the strictures are gradually loosening, interstate branch-banking is restricted in the United States; some states even limit branching within their borders. The British banking system is dominated by four large banks, each with a great number of branches. This system evolved because of the small size of the country, the early development of efficient transportation and communications, and legislation encouraging joint-stock bank companies, which spread risks among a number of owners and limited the liability of stockholders in case of a failure. Most countries of the British Commonwealth (except India) have followed the branch model. India, Japan, and most European countries can be located on a spectrum between these two extremes. The essential quality of banking is the creation of money, either through credit or government action. Financial institutions such as investment banks, home loan and savings banks, and finance companies cannot create money through credit; they can only lend deposits or funds they borrow from others. Commercial banks are required to keep only a portion of deposits as cash and near-cash. (Near-cash includes such short-term, safe, liquid instruments as treasury bills, commercial paper, and deposits at central or other commercial banks.) They make loans generally by crediting borrowers with an addition to their checking accounts, which are, effectively, approved overdrafts. These checks must be honoured by other banks, even if the funds were created by the bank through the loan. Since most payments generated by the loan return to the banking system as deposits, the creation of credit reinforces itself. Banking depends entirely on public confidence in the system's soundness, since no bank could pay all its depositors should all of them simultaneously demand cash, as may happen in a crisis. Commercial banks in most countries prefer to make short-term loans, since they involve less risk, although Japanese and German banks provide long-term financing. Central banks evolved in response to the recurrent financial crises of the 19th century that characterized the boom and bust cycles typical of market economies. The Bank of England was the first banker's banker; other countries followed its model, with the United States establishing its Federal Reserve System in 1913. Besides acting as banker to governments, central banks also have responsibility for the regulation of commercial banks, which they exercise by prohibiting excessively risky loans, auditing their books, supervising bank management, and lending money to banks facing a run on their cash resources. In recent decades central banks have become actively involved in economic policy, stabilizing foreign exchange markets, and controlling the growth of the supply of money and credit. Central banks enjoy varying degrees of autonomy from direct government control; in the United States, for example, the president appoints the members of the Federal Reserve Board to long and staggered terms; the intention of this system is to immunize members from short-term political pressures. Additional reading The development of banking systems The history of banking in several countries is detailed in R.D. Richards, The Early History of Banking in England (1929, reprinted 1965); John Clapham, The Bank of England, 2 vol. (1944, reissued 1970), covering 16941914; R.S. Sayers, The Bank of England, 18911944, 3 vol. (1976, reprinted 1986); Michael Collins, Money and Banking in the UK (1988), covering 18261985; Stanley Chapman, The Rise of Merchant Banking (1984), its history in Great Britain from its beginnings in the mid-18th century to the start of World War II; Bray Hammond, Banks and Politics in America, from the Revolution to the Civil War (1957, reissued 1991); Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 18671960 (1963); Benjamin J. Klebaner, American Commercial Banking (1990); and Hugh Neuburger, German Banks and German Economic Growth from Unification to World War I (1977). J.G. van Dillen (compiler), History of the Principal Public Banks (1934, reprinted 1964), outlines banking history in 10 European countries and Russia from the end of the 15th century to 1815. Other regional studies include Abbott Payson Usher, The Early History of Deposit Banking in Mediterranean Europe (1943, reissued 1967); and Charles P. Kindleberger, A Financial History of Western Europe, 2nd ed. (1993). The business of banking Good general surveys of banking and finance principles are John G. Gurley and Edward S. Shaw, Money in a Theory of Finance (1960, reissued 1971); and R.S. Sayers, Modern Banking, 7th ed. (1967). See also Kerry Cooper and Donald R. Fraser, Banking Deregulation and the New Competition in Financial Services (1984). The reference work by Glenn G. Munn, F.L. Garcia, Charles J. Woelfel, Encyclopedia of Banking and Finance, 9th ed., rev. and expanded (also published as The St. James Encyclopedia of Banking & Finance, 1991), contains short articles on all aspects of banking practice. See also William H. Baughn and Donald R. Mandich (eds.), The International Banking Handbook (1983); and William H. Baughn, Thomas I. Storrs, and Charles E. Walker (eds.), The Bankers' Handbook, 3rd ed. (1988). Modern commercial banking practices are addressed by Harold Wallgren, Principles of Bank Operations, rev. ed. (1975); and Edward W. Reed and Edward K. Gill, Commercial Banking, 4th ed. (1989), a textbook. The principles of central banking General discussions include M.H. De Kock, Central Banking, 4th ed. (1974); and R.S. Sayers, Central Banking After Bagehot (1957, reprinted 1982). Selected specific countries are treated in Bank for International Settlements, Eight European Central Banks (1963); Richard H. Timberlake, Jr., The Origins of Central Banking in the United States (1978); Board of Governors of the Federal Reserve System (U.S.), The Federal Reserve System: Purposes & Functions, 7th ed. (1984); E.P. Neufeld, Bank of Canada Operations and Policy (1958); H.A. de S. Gunasekera, From Dependent Currency to Central Banking in Ceylon (1962); and Reserve Bank of India, History of the Reserve Bank of India, 193551 (1970). The structure of modern banking systems A survey of the United Kingdom, the United States, and the Commonwealth countries is found in J.S.G. Wilson, Banking Policy and Structure: A Comparative Analysis (1986). A study of U.S. experience is Charles R. Whittlesey, Arthur M. Freedman, and Edward S. Herman, Money and Banking: Analysis and Policy, 2nd ed. (1968). Certain other countries are covered in H.W. Arndt and W.J. Blackert, The Australian Trading Banks, 5th ed. (1977); Robin Pringle (Robert Pringle), A Guide to Banking in Britain (1973); W.F. Crick (ed.), Commonwealth Banking Systems (1965); J.S.G. Wilson, French Banking Structure and Credit Policy (1957); Andreas R. Prindl, Japanese Finance: A Guide to Banking in Japan (1981); Yoshio Suzuki (ed.), The Japanese Financial System (1987, reissued 1992; originally published in Japanese, 1986); Rodney Wilson, Banking and Finance in the Arab Middle East (1983); S.A. Meenai, Money and Banking in Pakistan, 3rd ed. (1984); and R.S. Sayers (ed.), Banking in Western Europe (1962). For a discussion of historical value, see also Adam Zwass, Money, Banking, & Credit in the Soviet Union & Eastern Europe (1979). Articles on current banking practices in most countries are available in The Banker (monthly), published in London. John Stuart Gladstone Wilson The Editors of the Encyclopdia Britannica