A bank is a type of financial institution that performs two main functions:
- Accepting Deposits: It takes money from the public and keeps it safe. People deposit their money in a bank account, and in return, the bank gives them easy access to their funds, often paying a small amount of interest.
- Providing Loans: Banks also lend money to individuals, businesses, and governments. This means they allow others to borrow money and charge interest on these loans.
These loans help fund activities such as buying homes, starting businesses, and supporting government projects. Banks can lend money directly or participate in capital markets to facilitate borrowing.
Why Banks Are Important and How They Are Regulated
Banks are essential for financial stability and play a major role in a country’s economy. Because of their importance, most governments regulate banks heavily to ensure they are safe and reliable.
One widely used system is called fractional-reserve banking. This means banks only keep a portion of deposited money on hand and lend out the rest. For example, if someone deposits $100, the bank might only keep $10 in reserve and lend out $90.
To make sure banks are stable, there are international rules known as the Basel Accords, which set minimum requirements for the amount of money banks must keep to cover potential losses. These rules help ensure banks can handle financial shocks.
The Origins and History of Banking
Modern banking began in the 14th century in Renaissance Italy, a period known for its economic growth and innovation. However, banking concepts like lending and credit have much older roots, going back to ancient civilizations.
Throughout history, several banking families and firms became famous for their influence, such as:
- The Medicis and Pazzi in Italy
- The Fuggers and Welsers in Germany
- The Berenbergs in Germany
- The Rothschilds in Europe
Some banks have been around for centuries. For example:
- Banca Monte dei Paschi di Siena (founded in 1472 in Italy) is the oldest surviving retail bank.
- Berenberg Bank (founded in 1590 in Germany) is the oldest surviving merchant bank.
These banks were significant in shaping financial practices that still influence banking today.
The term “bank” comes from the Old Italian word banco, which means “table.” It was borrowed into Middle English from the Middle French word banque, which also has roots in Old High German banc or bank, meaning “bench” or “counter.”
In the Renaissance period, especially in cities like Florence, bankers would sit behind benches or tables to conduct business. They used these benches as their desks or exchange counters, handling deposits, loans, and other financial transactions. To make the setup look official and distinctive, they often covered their tables with green cloths. This setup was an early version of a banking counter, where bankers and clients would interact face-to-face. The word “bank” eventually evolved from these early practices, symbolizing a place where money and transactions were managed.
Bank Products
| Banking Product | Category | Description |
|---|---|---|
| ATM card | Retail Banking | Card for accessing funds at ATMs. |
| Credit card | Retail Banking | Card allowing purchases on credit. |
| Debit card | Retail Banking | Card for purchases or cash withdrawal directly from a bank account. |
| Savings account | Retail Banking | Deposit account for earning interest on savings. |
| Recurring deposit account | Retail Banking | Account for periodic deposits with fixed tenure and interest. |
| Fixed deposit account | Retail Banking | Time deposit account with fixed interest rate and tenure. |
| Money market account | Retail Banking | Account with higher interest rate, linked to money market instruments. |
| Certificate of deposit (CD) | Retail Banking | Time deposit with fixed interest rate for a specified term. |
| Mortgage | Retail Banking | Loan for purchasing property, secured against the property itself. |
| Mutual fund | Retail Banking | Investment fund pooling money to invest in stocks, bonds, or other securities. |
| Personal loan | Retail Banking | Loan for personal use; can be secured or unsecured. |
| Time deposits | Retail Banking | Deposits held for a fixed period with interest. |
| Current accounts | Retail Banking | Account for frequent transactions, typically without interest. |
| Cheque books | Retail Banking | Booklet provided for issuing checks to withdraw funds. |
| Automated Teller Machine (ATM) | Retail Banking | Machine for cash withdrawal, deposits, and basic transactions. |
| National Electronic Fund Transfer (NEFT) | Retail Banking | Electronic funds transfer system for interbank transfers. |
| Real-time Gross Settlement (RTGS) | Retail Banking | Instant electronic funds transfer for high-value transactions. |
| Business loan | Business Banking | Loan for business purposes, often used for expansion or operational costs. |
| Capital raising (equity, debt, hybrids) | Business Banking | Services to raise funds through stock, bonds, or mixed instruments. |
| Revolving credit | Business Banking | Credit line allowing repeated borrowing up to a limit. |
| Risk management (FX, interest rates, commodities, derivatives) | Business Banking | Services to manage financial risks related to currency, rates, and commodities. |
| Term loan | Business Banking | Loan with fixed interest rate and term for business financing. |
| Cash management services | Business Banking | Services for managing business cash flow and transactions. |
| Credit services | Business Banking | Various forms of credit provided to businesses. |
| Securities services | Business Banking | Services related to handling and managing securities for businesses. |