/bangk/, n.
1. a long pile or heap; mass: a bank of earth; a bank of clouds.
2. a slope or acclivity.
3. Physical Geog. the slope immediately bordering a stream course along which the water normally runs.
4. a broad elevation of the sea floor around which the water is relatively shallow but not a hazard to surface navigation.
5. Coal Mining. the surface around the mouth of a shaft.
6. Also called cant, superelevation. the inclination of the bed of a banked road or railroad.
7. Aeron. the lateral inclination of an aircraft, esp. during a turn.
8. Billiards, Pool. the cushion of the table.
9. to border with or like a bank; embank: banking the river with sandbags at flood stage.
10. to form into a bank or heap (usually fol. by up): to bank up the snow.
11. to build (a road or railroad track) with an upward slope from the inner edge to the outer edge at a curve.
12. Aeron. to tip or incline (an airplane) laterally.
13. Billiards, Pool.
a. to drive (a ball) to the cushion.
b. to pocket (the object ball) by driving it against the bank.
14. to cover (a fire) with ashes or fuel to make it burn long and slowly.
15. to build up in or form banks, as clouds or snow.
16. Aeron. to tip or incline an airplane laterally.
17. Horol. (of a lever or balance) to be halted at either end of its oscillation by striking a pin or the like.
18. (of a road or railroad track) to slope upward from the inner edge to the outer edge at a curve.
[1150-1200; ME banke, OE hobanca couch; c. ON bakki elevation, hill, Sw backe, Dan bakke < Gmc *bank-on-; perh. akin to Skt bhañj- bend, Lith bangà wave; see BANK3, BENCH]
Syn. 1. embankment, mound, ridge, dike. 3. See shore1.
/bangk/, n.
1. an institution for receiving, lending, exchanging, and safeguarding money and, in some cases, issuing notes and transacting other financial business.
2. the office or quarters of such an institution.
3. Games.
a. the stock or fund of pieces from which the players draw.
b. the fund of the manager or the dealer.
4. a special storage place: a blood bank; a sperm bank.
5. a store or reserve.
6. Obs.
a. a sum of money, esp. as a fund for use in business.
b. a moneychanger's table, counter, or shop.
7. to keep money in or have an account with a bank: Do you bank at the Village Savings Bank?
8. to exercise the functions of a bank or banker.
9. Games. to hold the bank.
10. to deposit in a bank: to bank one's paycheck.
11. bank on or upon, to count on; depend on: You can bank on him to hand you a reasonable bill for his services.
[1425-75; late ME < MF banque < It banca table, counter, moneychanger's table < OHG bank BENCH]
/bangk/, n.
1. an arrangement of objects in a line or in tiers: a bank of seats; a bank of lights.
2. Music. a row of keys on an organ.
3. a row of elevator cars, as in a hotel or high-rise office building.
4. a bench for rowers in a galley.
5. a row or tier of oars.
6. the group of rowers occupying one bench or rowing one oar.
7. Print.
a. (formerly) a bench on which sheets are placed as printed.
b. Also called, esp. Brit., random. the sloping work surface at the top of a compositor's workbench.
c. a table or rack on which type material is stored before being made up in forms.
8. Also called deck. Journalism. a part of a headline containing one or more lines of type, esp. a part that appears below the main part.
9. Elect. a number of similar devices connected to act together: a bank of transformers; a bank of resistors.
10. to arrange in a bank: to bank the seats; to bank the lights.
[1200-50; ME bank(e) < OF banc bench < Gmc; see BANK1]

* * *

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 paid to lenders (depositors) and charged to borrowers, respectively. They also profit from fees charged for services. The three major classes of banks are commercial banks, investment banks, and central banks. Banking depends entirely on public confidence in the system's soundness; no bank could pay all its depositors should they simultaneously demand cash, as may happen in a panic. See also credit union; Federal Reserve System; savings and loan association; savings bank.
(as used in expressions)
Green Bank equation
Export Import Bank of the United States Ex Im Bank
Inter American Development Bank
Banks Ernie
Ernest Banks
Banks Russell
Banks Sir Joseph
Liverpool Robert Banks Jenkinson 2nd earl of
Mullis Kary Banks

* * *


      an institution that deals in money and its substitutes and provides other money-related services. In its role as a financial intermediary, a bank accepts deposits and makes loans. It derives a profit from the difference between the costs (including interest payments) of attracting and servicing deposits and the income it receives through interest charged to borrowers or earned through securities. Many banks provide related services such as financial management and products such as mutual funds (mutual fund) and credit cards (credit card). Some bank liabilities also serve as money—that is, as generally accepted means of payment and exchange.

      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.

Principles of banking
      The central practice of banking consists of borrowing and lending. As in other businesses, operations must be based on capital, but banks employ comparatively little of their own capital in relation to the total volume of their transactions. Instead banks use the funds obtained through deposits and, as a precaution, maintain capital and reserve accounts to protect against losses on their loans and investments and to provide for unanticipated cash withdrawals. Genuine banks are distinguished from other kinds of financial intermediaries by the readily transferable or “spendable” nature of at least some of their liabilities (also known as IOUs), which allows those liabilities to serve as means of exchange—that is, as money.

Types of banks
 The principal types of banks in the modern industrial world are commercial banks (commercial bank), which are typically private-sector profit-oriented firms, and central banks (central bank), which are public-sector institutions. Commercial banks accept deposits from the general public and make various kinds of loans (including commercial, consumer, and real-estate loans) to individuals and businesses and, in some instances, to governments. Central banks, in contrast, deal mainly with their sponsoring national governments, with commercial banks, and with each other. Besides accepting deposits from and extending credit to these clients, central banks also issue paper currency and are responsible for regulating commercial banks and national money stocks.

      The term commercial bank covers institutions ranging from small neighbourhood banks to huge metropolitan institutions or multinational organizations with hundreds of branches. Although U.S. banking regulations limited the development of nationwide bank chains through most of the 20th century, legislation in 1994 easing these limitations led American commercial banks to organize along the lines of their European counterparts, which typically operated offices and bank branches in many regions.

      In the United States a distinction exists between commercial banks and so-called thrift institutions, which include savings and loan associations (savings and loan association) (S&Ls), credit unions (credit union), and savings banks (savings bank). Like commercial banks, thrift institutions accept deposits and fund loans, but unlike commercial banks, thrifts have traditionally focused on residential mortgage lending rather than commercial lending. The growth of a separate thrift industry in the United States was largely fostered by regulations unique to that country; these banks therefore lack a counterpart elsewhere in the world. Moreover, their influence has waned: the pervasive deregulation of American commercial banks, which originated in the wake of S&L failures during the late 1980s, weakened the competitiveness of such banks and left the future of the U.S. thrift industry in doubt.

 While these and other institutions are often called banks, they do not perform all the banking functions described above and are best classified as financial intermediaries. Institutions that fall into this category include finance companies, savings banks (savings bank), investment banks (investment bank) (which deal primarily with large business clients and are mainly concerned with underwriting and distributing new issues of corporate bonds and equity shares), trust companies (trust company), finance companies (which specialize in making risky loans and do not accept deposits), insurance companies, mutual fund companies, and home-loan banks or savings and loan associations. One particular type of commercial bank, the merchant bank (known as an investment bank in the United States), engages in investment banking activities such as advising on mergers and acquisitions. In some countries, including Germany, Switzerland, France, and Italy, so-called universal banks supply both traditional (or “narrow”) commercial banking services and various nonbank financial services such as securities underwriting and insurance. Elsewhere, regulations, long-established custom, or a combination of both have limited the extent to which commercial banks have taken part in the provision of nonbank financial services.

Bank money
      The development of trade and commerce drove the need for readily exchangeable forms of money. The concept of bank money originated with the Amsterdamsche Wisselbank (the Bank of Amsterdam), which was established in 1609 during Amsterdam's ascent as the largest and most prosperous city in Europe. As an exchange bank, it permitted individuals to bring money or bullion for deposit and to withdraw the money or the worth of the bullion. The original ordinance that established the bank further required that all bills of 600 gulden or upward should be paid through the bank—in other words, by the transfer of deposits or credits at the bank. These transfers later came to be known as “bank money.” The charge for making the transfers represented the bank's sole source of income.

      In contrast to the earliest forms of money, which were commodity moneys based on items such as seashells, tobacco, and precious-metal coin, practically all contemporary money takes the form of bank money, which consists of checks (check) or drafts that function as commercial or central bank IOUs. Commercial bank money consists mainly of deposit balances that can be transferred either by means of paper orders (e.g., checks) or electronically (e.g., debit cards (debit card), wire transfers, and Internet payments). Some electronic-payment systems are equipped to handle transactions in a number of currencies.

      Circulating “banknotes,” yet another kind of commercial bank money, are direct claims against the issuing institution (rather than claims to any specific depositor's account balance). They function as promissory notes (promissory note) issued by a bank and are payable to a bearer on demand without interest, which makes them roughly equivalent to money. Although their use was widespread before the 20th century, banknotes have been replaced largely by transferable bank deposits. In the early 21st century only a handful of commercial banks, including ones located in Northern Ireland, Scotland, and Hong Kong, issued banknotes. For the most part, contemporary paper currency consists of fiat money (from the medieval Latin term meaning “let it be done”), which is issued by central banks or other public monetary authorities.

      All past and present forms of commercial bank money share the characteristic of being redeemable (that is, freely convertible at a fixed rate) in some underlying base money, such as fiat money (as is the case in contemporary banking) or a commodity money such as gold or silver coin. Bank customers are effectively guaranteed the right to seek unlimited redemptions of commercial bank money on demand (that is, without delay); any commercial bank refusing to honour the obligation to redeem its bank money is typically deemed insolvent. The same rule applies to the routine redemption requests that a bank makes, on behalf of its clients, upon another bank—as when a check drawn upon Bank A is presented to Bank B for collection.

      While commercial banks remain the most important sources of convenient substitutes for base money, they are no longer exclusive suppliers of money substitutes. Money-market mutual funds and credit unions (credit union) offer widely used money substitutes by permitting the persons who own shares in them to write checks from their accounts. (Money-market funds and credit unions differ from commercial banks in that they are owned by and lend only to their own depositors.) Another money substitute, traveler's checks, resembles old-fashioned banknotes to some degree, but they must be endorsed by their users and can be used for a single transaction only, after which they are redeemed and retired.

      For all the efficiencies that bank money brings to financial transactions and the marketplace, a heavy reliance upon it—and upon spendable bank deposits in particular—can expose economies to banking crises. This is because banks hold only fractional reserves of basic money, and any concerted redemption of a bank's deposits—which could occur if the bank is suspected of insolvency—can cause it to fail. On a larger scale, any concerted redemption of a country's bank deposits (assuming the withdrawn funds are not simply redeposited in other banks) can altogether destroy an economy's banking system, depriving it of needed means of exchange as well as of business and consumer credit. Perhaps the most notorious example of this was the U.S. banking crisis of the early 1930s (see Banking panics and monetary contraction (Great Depression)); a more recent example was the Asian currency crisis that originated in Thailand in 1997.

Bank loans (credit)
      Bank loans, which are available to businesses of all types and sizes, represent one of the most important sources of commercial funding throughout the industrialized world. Key sources of funding for corporations include loans, stock and bond issues, and income. In the United States, for example, the funding that business enterprises obtain from banks is roughly twice the amount they receive by marketing their own bonds, and funding from bank loans is far greater still than what companies acquire by issuing shares of stock. In Germany and Japan bank loans represent an even larger share of total business funding. Smaller and more specialized sources of funding include venture capital firms and hedge funds.

      Although all banks make loans, their lending practices differ, depending on the areas in which they specialize. Commercial loans, which can cover time frames ranging from a few weeks to a decade or more, are made to all kinds of businesses and represent a very important part of commercial banking worldwide. Some commercial banks devote an even greater share of their lending to real-estate financing (through mortgages and home-equity loans) or to direct consumer loans (such as personal and automobile loans). Others specialize in particular areas, such as agricultural loans or construction loans. As a general business practice, most banks do not restrict themselves to lending but acquire and hold other assets, such as government and corporate securities and foreign exchange (that is, cash or securities denominated in foreign currency units).

Historical development

Early banking
      Some authorities, relying upon a broad definition of banking that equates it with any sort of intermediation activity, trace banking as far back as ancient Mesopotamia (Mesopotamia, history of), where temples, royal palaces, and some private houses served as storage facilities for valuable commodities such as grain, the ownership of which could be transferred by means of written receipts. There are records of loans by the temples of Babylon as early as 2000 BC; temples were considered especially safe depositories because, as they were sacred places watched over by gods, their contents were believed to be protected from theft. Companies of traders in ancient times provided banking services that were connected with the buying and selling of goods.

      Many of these early “protobanks” dealt primarily in coin and bullion, much of their business being money changing and the supplying of foreign and domestic coin of the correct weight and fineness. Full-fledged banks did not emerge until medieval times, with the formation of organizations specializing in the depositing and lending of money and the creation of generally spendable IOUs that could serve in place of coins or other commodity moneys. In Europe (Europe, history of) so-called “merchant bankers” paralleled the development of banking by offering, for a consideration, to assist merchants in making distant payments, using bills of exchange instead of actual coin. The merchant banking business arose from the fact that many merchants traded internationally, holding assets at different points along trade routes. For a certain consideration, a merchant stood prepared to accept instructions to pay money to a named party through one of his agents elsewhere; the amount of the bill of exchange would be debited by his agent to the account of the merchant banker, who would also hope to make an additional profit from exchanging one currency against another. Because there was a possibility of loss, any profit or gain was not subject to the medieval ban on usury. There were, moreover, techniques for concealing a loan by making foreign exchange available at a distance but deferring payment for it so that the interest charge could be camouflaged as a fluctuation in the exchange rate.

      The earliest genuine European banks, in contrast, dealt neither in goods nor in bills of exchange but in gold and silver coins and bullion, and they emerged in response to the risks involved in storing and transporting precious metal moneys and, often, in response to the deplorable quality of available coins, which created a demand for more reliable and uniform substitutes.

      In continental Europe dealers in foreign coin, or “money changers,” were among the first to offer basic banking services, while in London money “scriveners” and goldsmiths played a similar role. Money scriveners were notaries who found themselves well positioned for bringing borrowers and lenders together, while goldsmiths began their transition to banking by keeping money and valuables in safe custody for their customers. Goldsmiths also dealt in bullion and foreign exchange, acquiring and sorting coin for profit. As a means of attracting coin for sorting, they were prepared to pay a rate of interest, and it was largely in this way that they eventually began to outcompete money scriveners as deposit bankers.

      Banks in Europe from the 16th century onward could be divided into two classes: exchange banks and banks of deposit. The last were banks that, besides receiving deposits, made loans and thus associated themselves with the trade and industries of a country. The exchange banks included in former years institutions such as the Bank of Hamburg and the Bank of Amsterdam. These were established to deal with foreign exchange and to facilitate trade with other countries. The others—founded at very different dates—were established as, or early became, banks of deposit, such as the Bank of England (England, Bank of), the Bank of Venice, the Bank of Sweden, the Bank of France, the Bank of Germany, and others. Important as exchange banks were in their day, the period of their activity had generally passed by the last half of the 19th century.

      In one particularly notable respect, the business carried on by the exchange banks differed from banking as generally understood at the time. Exchange banks were established for the primary purpose of turning the values with which they were entrusted into bank money—that is, into a currency that merchants accepted immediately, with no need to test the value of the coin or the bullion given to them. The value the banks provided was equal to the value they received, with the only difference being the small amount charged to their customers for performing such transactions. No exchange bank had capital of its own, nor did it require any for the performance of its business.

      In every case deposit banking at first involved little more than the receipt of coins for safekeeping or warehousing, for which service depositors were required to pay a fee. By early modern times this warehousing function had given way in most cases to genuine intermediation, with deposits becoming debt as opposed to bailment contracts, and depositors sharing in bank interest earnings instead of paying fees. (See bailment.) Concurrent with this change was the development of bank money, which had begun with transfers of deposit credits by means of oral and later written instructions to bankers and also with the endorsement and assignment of written deposit receipts; each transaction presupposed legal acknowledgement of the fungible status of deposited coins. Over time, deposit transfers by means of written instructions led directly to modern checks.

The development of banknotes
      Although the Bank of England (England, Bank of) is usually credited with being the source of the Western world's first widely circulated banknotes, the Stockholms Banco (Bank of Stockholm, founded in 1656 and the predecessor of the contemporary Bank of Sweden) is known to have issued banknotes several decades before the Bank of England's establishment in 1694, and some authorities claim that notes issued by the Casa di San Giorgio (Bank of Genoa, established in 1407), although payable only to specific persons, were made to circulate by means of repeated endorsements. In Asia paper money has a still longer history, its first documented use having been in China during the 9th century, when “flying money,” a sort of draft or bill of exchange developed by merchants, was gradually transformed into government-issued fiat money. The 12th-century Tatar war caused the government to abuse this new financial instrument, and China thereby earned credit not merely for the world's first paper money but also for the world's first known episode of hyperinflation. Several more such episodes caused the Chinese government to cease issuing paper currency, leaving the matter to private bankers. By the late 19th century, China had developed a unique and, according to many accounts, successful bank money system, consisting of paper notes issued by unregulated local banks and redeemable in copper coin. Yet the system was undermined in the early 20th century, first by demands made by the government upon the banks and ultimately by the decision to centralize and nationalize China's paper currency system.

      The development of bank money increased bankers' ability to extend credit by limiting occasions when their clients would feel the need to withdraw currency. The increasingly widespread use of bank money eventually allowed bankers to exploit the law of large numbers, whereby withdrawals would be offset by new deposits. Market competition, however, prevented banks from extending credit beyond reasonable means, and each bank set aside cash reserves, not merely to cover occasional coin withdrawals but also to settle interbank accounts. Bankers generally found it to be in their interest to receive, on deposit, checks drawn upon or notes issued by rivals in good standing; it became a standard practice for such notes or checks to be cleared (that is, returned to their sources) on a routine (usually daily) basis, where the net amounts due would be settled in coin or bullion. Starting in the late 18th century, bankers found that they could further economize on cash reserves by setting up clearinghouses in major cities to manage nonlocal bank money clearings and settlements, as doing so allowed further advantage to be taken of opportunities for “netting out” offsetting items, that is, offsetting gross credits with gross debits, leaving net dues alone to be settled with specie (coin money). Clearinghouses were the precursors to contemporary institutions such as clearing banks, automated clearinghouses, and the Bank for International Settlements (International Settlements, Bank for). Other financial innovations, such as the development of bailment and bank money, created efficiencies in transactions that complemented the process of industrialization. In fact, many economists, starting with the Scottish philosopher Adam Smith (Smith, Adam), have attributed to banks a crucial role in promoting industrialization.

Commercial banks (commercial bank)

Operations and management
      The essential business of banking involves granting bank deposit credits or issuing IOUs in exchange for deposits (which are claims to base money, such as coins or fiat paper money); banks then use the base money—or that part of it not needed as cash reserves—to purchase other IOUs with the goal of earning a profit on that investment. The business may be most readily understood by considering the elements of a simplified bank balance sheet, where a bank's available resources—its “assets”—are reckoned alongside its obligations, or “liabilities.”

      Bank assets consist mainly of various kinds of loans and marketable securities and of reserves of base money, which may be held either as actual central bank notes and coins or in the form of a credit (deposit) balance at the central bank. The bank's main liabilities are its capital (including cash reserves and, often, subordinated debt) and deposits. The latter may be from domestic or foreign sources (corporations (corporation) and firms, private individuals, other banks, and even governments). They may be repayable on demand (sight deposits or current accounts) or after a period of time (time, term, or fixed deposits and, occasionally, savings deposits). The bank's assets include cash; investments or securities; loans and advances made to customers of all kinds, though primarily to corporations (including term loans and mortgages); and, finally, the bank's premises, furniture, and fittings.

      The difference between the fair market value of a bank's assets and the book value of its outstanding liabilities represents the bank's net worth. A bank lacking positive net worth is said to be “insolvent,” and it generally cannot remain open unless it is kept afloat by means of central bank support. At all times a bank must maintain cash balances to pay its depositors upon demand. 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.

      The main resource of a modern bank is borrowed money (that is, deposits), which the bank loans out as profitably as is prudent. Banks also hold cash reserves for interbank settlements as well as to provide depositors with cash on demand, thereby maintaining a “safe” ratio of cash to deposits. The safe cash-to-assets ratio may be established by convention or by statute. If a minimum cash ratio is required by law, a portion of a bank's assets is in effect frozen and not available to meet sudden demands for cash from the bank's customers (though the requirement can be enforced in such a way as to allow banks to dip into required reserves on occasion, e.g., by substituting “lagged” for “contemporaneous” reserve accounting). To provide more flexibility, required ratios are frequently based on the average of cash holdings over a specified period, such as a week or a month.

      Unless a bank held cash equivalent to 100 percent of its demand deposits, it could not meet the claims of depositors were they all to exercise in full and at the same time their right to demand cash. If that were a common phenomenon, deposit banking could not survive. For the most part, however, the public is prepared to leave its surplus funds on deposit with banks, confident that money will be available when needed. But there may be times when unexpected demands for cash exceed what might reasonably have been anticipated; therefore, a bank must not only hold part of its assets in cash but also must keep a proportion of the remainder in assets that can be quickly converted into cash without significant loss.

Asset management
      A bank may mobilize its assets in several ways. It may demand repayment of loans, immediately or at short notice; it may sell securities; or it may borrow from the central bank, using paper representing investments or loans as security. Banks do not precipitately call in loans or sell marketable assets, because this would disrupt the delicate debtor-creditor relationship and lessen confidence, which probably would result in a run on the banks. Banks therefore maintain cash reserves and other liquid assets at a certain level or have access to a “lender of last resort,” such as a central bank. In a number of countries, commercial banks have at times been required to maintain a minimum liquid assets ratio. Among the assets of commercial banks, investments are less liquid than money-market assets. By maintaining an appropriate spread of maturities (through a combination of long-term and short-term investments), however, it is possible to ensure that a proportion of a bank's investments will regularly approach redemption. This produces a steady flow of liquidity and thereby constitutes a secondary liquid assets reserve.

      Yet this necessity—to convert a significant portion of its liabilities into cash on demand—forces banks to “borrow short and lend long.” Because most bank loans have definite maturity dates, banks must exchange IOUs that may be redeemed at any time for IOUs that will not come due until some definite future date. That makes even the most solvent banks subject to liquidity risk—that is, the risk of not having enough cash (base money) on hand to meet demands for immediate payment.

      Banks manage this liquidity risk in a number of ways. One approach, known as asset management, concentrates on adjusting the composition of the bank's assets—its portfolio of loans, securities, and cash. This approach exerts little control over the bank's liabilities and overall size, both of which depend on the number of customers who deposit savings in the bank. In general, bank managers build a portfolio of assets capable of earning the greatest interest revenue possible while keeping risks within acceptable bounds. Bankers must also set aside cash reserves sufficient to meet routine demands (including the demand for reserves to meet minimum statutory requirements) while devoting remaining funds mainly to short-term commercial loans. The presence of many short-term loans among a bank's assets means that some bank loans are always coming due, making it possible for a bank to meet exceptional cash withdrawals or settlement dues by refraining from renewing or replacing some maturing loans.

      The practice among early bankers of focusing on short-term commercial loans, which was understandable given the assets they had to choose from, eventually became the basis for a fallacious theory known as the “real bills doctrine,” according to which there could be no risk of banks overextending themselves or generating inflation as long as they stuck to short-term lending, especially if they limited themselves to discounting commercial bills or promissory notes supposedly representing “real” goods in various stages of production. The real bills doctrine erred in treating both the total value of outstanding commercial bills and the proportion of such bills presented to banks for discounting as being values independent of banking policy (and independent of bank discount and interest rates in particular). According to the real bills doctrine, if such rates are set low enough, the volume of loans and discounts will increase while the outstanding quantity of bank money will expand; in turn, this expansion may cause the general price level to rise. As prices rise, the nominal stock of “real bills” will tend to grow as well. Inflation might therefore continue forever despite strict adherence by banks to the real bills rule.

      Although the real bills doctrine continues to command a small following among some contemporary economists, by the late 19th century most bankers had abandoned the practice of limiting themselves to short-term commercial loans, preferring instead to mix such loans with higher-yielding long-term investments. This change stemmed in part from increased transparency and greater efficiency in the market for long-term securities. These improvements have made it easy for an individual bank to find buyers for such securities whenever it seeks to exchange them for cash. Banks also have made greater use of money-market assets such as treasury bills, which combine short maturities with ready marketability and are a favoured form of collateral for central bank loans.

      Commercial banks in some countries, including Germany, also make long-term loans to industry (also known as commercial loans) despite the fact that such loans are neither self-liquidating (capable of generating cash) nor readily marketable. These banks must ensure their liquidity by maintaining relatively high levels of capital (including conservatively valued shares in the enterprises they are helping to fund) and by relying more heavily on longer-term borrowings (including time deposits as well as the issuance of bonds or unsecured debt, such as debentures). In other countries, including Japan and the United States, long-term corporate financing is handled primarily by financial institutions that specialize in commercial loans and securities underwriting rather than by banks.

Liability and risk management
      The traditional asset management approach to banking is based on the assumption that a bank's liabilities are both relatively stable and unmarketable. Historically, each bank relied on a market for its deposit IOUs that was influenced by the bank's location, meaning that any changes in the extent of the market (and hence in the total amount of resources available to fund the bank's loans and investments) were beyond a bank's immediate control. In the 1960s and '70s, however, this assumption was abandoned. The change occurred first in the United States, where rising interest rates, together with regulations limiting the interest rates banks could pay, made it increasingly difficult for banks to attract and maintain deposits. Consequently, bankers devised a variety of alternative devices for acquiring funds, including repurchase agreements, which involve the selling of securities on the condition that buyers agree to repurchase them at a stated date in the future, and negotiable certificates of deposit (certificate of deposit) (CDs), which can be traded in a secondary market. Having discovered new ways to acquire funds, banks no longer waited for funds to arrive through the normal course of business. The new approaches enabled banks to manage the liability as well as the asset side of their balance sheets. Such active purchasing and selling of funds by banks, known as liability management, allows bankers to exploit profitable lending opportunities without being limited by a lack of funds for loans. Once liability management became an established practice in the United States, it quickly spread to Canada and the United Kingdom and eventually to banking systems worldwide.

      A still more recent approach to bank management synthesizes the asset- and liability-management approaches. Known as risk management, this approach essentially treats banks as bundles of risks (risk); the primary challenge for bank managers is to establish acceptable degrees of risk exposure. This means bank managers must calculate a reasonably reliable measure of their bank's overall exposure to various risks and then adjust the bank's portfolio to achieve both an acceptable overall risk level and the greatest shareholder value consistent with that level.

      Contemporary banks face a wide variety of risks. In addition to liquidity risk, they include credit risk (the risk that borrowers will fail to repay their loans on schedule), interest-rate risk (the risk that market interest rates will rise relative to rates being earned on outstanding long-term loans), market risk (the risk of suffering losses in connection with asset and liability trading), foreign-exchange risk (the risk of a foreign currency in which loans have been made being devalued during the loans' duration), and sovereign risk (the risk that a government will default on its debt). The risk-management approach differs from earlier approaches to bank management in advocating not simply the avoidance of risk but the optimization of it—a strategy that is accomplished by mixing and matching various risky assets, including investment instruments traditionally shunned by bankers, such as forward and futures contracts, options (security), and other so-called “derivatives” (securities whose value derives from that of other, underlying assets). Despite the level of risk associated with them, derivatives can be used to hedge losses on other risky assets. For example, a bank manager may wish to protect his bank against a possible fall in the value of its bond holdings if interest rates rise during the following three months. In this case he can purchase a three-month forward contract—that is, by selling the bonds for delivery in three months' time—or, alternatively, take a short position—a promise to sell a particular amount at a specific price—in bond futures. If interest rates do happen to rise during that period, profits from the forward contract or short futures position should completely offset the loss in the capital value of the bonds. The goal is not to change the expected portfolio return but rather to reduce the variance of the return, thereby keeping the actual return closer to its expected value.

      The risk management approach relies upon techniques, such as value at risk, or VAR (which measures the maximum likely loss on a portfolio during the next 100 days or so), that quantify overall risk exposure. One shortcoming of such risk measures is that they generally fail to consider high-impact, low-probability events, such as the bombing of the Central Bank of Sri Lanka in 1996 or the attack on the World Trade Center in New York City in 2001. For this reason, traditional bank-management tools, including reliance upon bank capital, must continue to play a role in risk management.

The role of bank capital (capital and interest)
      Because even the best risk management techniques cannot guarantee against losses, banks cannot rely on deposits alone to fund their investments. Funding also comes from share owners' equity, which means that bank managers must concern themselves with the value of the bank's equity capital as well as the composition of the bank's assets and liabilities. A bank's shareholders, however, are residual claimants, meaning that they may share in the bank's profits but are also the first to bear any losses stemming from bad loans or failed investments. When the value of a bank's assets declines, shareholders bear the loss, at least up to the point at which their shares become worthless, while depositors stand to suffer only if losses mount high enough to exhaust the bank's equity, rendering the bank insolvent. In that case, the bank may be closed and its assets liquidated, with depositors (and, after them, if anything remains, other creditors) receiving prorated shares of the proceeds. Where bank deposits are not insured or otherwise guaranteed by government authorities, bank equity capital serves as depositors' principal source of security against bank losses. Deposit guarantees, whether explicit (as with deposit insurance) or implicit (as when government authorities are expected to bailout failing banks), can have the unintended consequence of reducing a bank's equity capital, for which such guarantees are a substitute. Regulators have in turn attempted to compensate for this effect by regulating bank capital. For example, the second Basel Accord, or Basel II, which has been implemented within the European Union and, to a limited extent, in the United States, establishes minimum capital requirements for different banks based on a formula that attempts to account for the risks to which each is exposed.

Regulation of commercial banks
      For most developed countries the late 20th century was marked by a notable easing of regulations and restrictions in the banking industry. In the United States, for example, many regulations had originated in response to problems experienced during the Great Depression, especially in 1933, when the federal government closed the country's banks and permitted only those deemed solvent to reopen. By the end of the century the risk of widespread economic failure, such as that experienced in the Great Depression, had grown increasingly unlikely. Banking remains a heavily regulated business, however. Contemporary bank regulations are intended to limit bank failures and to protect bank depositors from losses stemming from such failures. Numerous other regulations apply to concerns such as the privacy of bank customers, fair lending practices, and the prevention of money laundering.

Entry and branching restrictions
      Historically, many countries restricted entry into the banking business by granting special charters to select firms. While the practice of granting charters has become obsolete, many countries effectively limit or prevent foreign banks or subsidiaries from entering their banking markets and thereby insulate their domestic banking industries from foreign competition.

      In the United States through much of the 20th century, a combination of federal and state regulations, such as the Banking Act of 1933, prohibited interstate banking and prevented the development of nationwide bank branches. Although the intent of the Depression-era legislation was the prevention of banking collapses, in many cases states prohibited statewide branch banking owing to the political influence of small-town bankers interested in limiting their competitors by creating geographic monopolies. Eventually competition from nonbank financial services firms, such as investment companies, loosened the banks' hold on their local markets. In large cities and small towns alike, securities firms and insurance companies began marketing a range of liquid financial instruments, some of which could serve as checking accounts. Rapid changes in financial structure and the increasingly competitive supply of financial services led to the passage of the Depository Institutions Deregulation and Monetary Control Act in 1980. Its principal objectives were to improve monetary control and equalize its cost among depository institutions, to remove impediments to competition for funds by depository institutions while allowing the small saver a market rate of return, and to expand the availability of financial services to the public and reduce competitive inequalities between the financial institutions offering them. Finally, in 1994, interstate branch banking became legal in the United States through the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act.

Interest rate controls
      One of the oldest forms of bank regulation consists of laws restricting the rates of interest bankers are allowed to charge on loans or to pay on deposits. Ancient and medieval Christians (Christianity) held it to be immoral for a lender to earn interest from a venture that did not involve substantial risk of loss. However, this injunction was relatively easy to circumvent: interest could be excused if the lender could demonstrate that the loan was risky or that it entailed a sacrifice of some profitable investment opportunity. Interest also could be built into currency-exchange charges, with money lent in one currency and repaid (at an artificially enhanced exchange rate) in another. Finally, the taint of usury could be removed by recasting loans as investment-share sale and repurchase agreements—not unlike contemporary overnight repurchase agreements. Over time, as church doctrines were reinterpreted to accommodate the needs of business, such devices became irrelevant, and the term usury came to refer only to excessive interest charges.

      Islamic law (Sharīʿah) also prohibits the collection of interest. Consequently, in most Muslim (Islāmic world) countries financial intermediation is based not on debt contracts involving explicit interest payments but on profit-and-loss-sharing arrangements, in which banks and their depositors assume a share of ownership of their creditors' enterprises. (This was the case in some medieval Christian arrangements as well.) Despite the complexity of the Islamic approach, especially with regard to contracts, effective banking systems developed as alternatives to their Western counterparts. Yet during the 1960s and early '70s, when nominal market rates of interest exceeded 20 percent in much of the world, Islamic-style banks risked being eclipsed by Western-style banks that could more readily adjust their lending terms to reflect changing market conditions. Oil revenues eventually improved the demand for Islamic banking, and by the early 21st century hundreds of Islamic-style financial institutions existed around the world, handling hundreds of billions of dollars in annual transactions. Consequently, some larger multinational banks in the West began to offer banking services consistent with Islamic law.

      The strict regulation of lending rates—that is, the setting of maximum rates, or the outright prohibition of interest-taking—has been less common outside Muslim countries. Markets are far more effective than regulations at influencing interest rates, and the wide variety of loans, all of which involve differing degrees of risk, make the design and enforcement of such regulations difficult. By the 21st century most countries had stopped regulating the rate of interest paid on deposits.

Mandatory cash reserves
      Minimum cash reserves have been a long-established form of bank regulation. The requirement that each bank maintain a minimum reserve of base money has been justified on the grounds that it reduces the bank's exposure to liquidity risk (insolvency) and aids the central bank's efforts to maintain control over national money stocks (by preserving a more stable relationship between the outstanding quantity of base money, which central banks are able directly to regulate, and the outstanding quantity of bank money).

      A third objective of legal reserve requirements is that of securing government revenue. Binding reserve requirements contribute to the overall demand for basic money—which consists of central bank deposit credits and notes—and therefore enhance as well the demand for government securities that central bank banks typically hold as backing for their outstanding liabilities. A greater portion of available savings is thus channeled from commercial bank customers to the public sector. Bank depositors feel the effect of the transfer in the form of lowered net interest earnings on their deposits. The higher the minimum legal reserve ratio, the greater the proportion of savings transferred to the public sector.

      Some economists have challenged the concept of legal reserve requirements by arguing that they are not necessary for effective monetary control. They also suggest that such requirements could be self-defeating; if the requirements are rigidly enforced, banks may resist drawing upon reserves altogether if doing so would mean violating the requirement. Encouraged by such arguments, more than a dozen countries, including Canada, Sweden, Australia, and New Zealand, abolished mandatory reserve requirements starting in the mid-1980s.

Capital (capital and interest) standards
      As discussed above, bank capital protects bank depositors from losses by treating bank shareholders as “residual claimants” who risk losing their equity share if a bank is unable to honour its commitments to depositors. One means of ensuring an adequate capital cushion for banks has been the imposition of minimum capital standards in tandem with the establishment of required capital-to-asset ratios, which vary depending upon a bank's exposure to various risks.

      The most important step in this direction was the Basel Accord, which was implemented in stages by the Group of Ten countries (also known as G-10, a group of industrialized countries that began in 1988 to strive for cooperation in monetary and economic policies; in the early 21st century, the G-10 had 11 member countries). The accord established an 8 percent capital-to-asset ratio target, with bank assets weighted according to the risk of loss; weights range from zero (for top-rated government securities) to one (for some corporate bonds).

      Instead of attempting to regulate privately owned banks, governments sometimes prefer to run the banks themselves. Both Karl Marx and Vladimir Lenin advocated the centralization of credit through the establishment of a single monopoly bank, and the nationalization of Russia's commercial banks was one of the first reform measures taken by the Bolsheviks when they came to power in 1917. Nonetheless, the Soviet Union found itself without a functioning monetary system following the Bolsheviks' reform.

      Nationalized banks can be found in many partially socialized or mixed economies, especially in less-developed economies, where they sometimes coexist with privately owned banks. There they are justified on the grounds that nationalized banks are a necessary element of a developing country's economic growth. The general performance of such banks, like that of banks in socialist economies, has been poor, largely because of a lack of incentives needed to promote efficiency. Some have experienced higher delinquency rates on their loans, owing in part to government-mandated lending to insolvent enterprises. There are exceptions. While nationalized banks have tended to be overstaffed, slow in providing services to borrowers, and unprofitable, the State Bank of India is recognized for customer satisfaction, and many state-owned banks in South Asia perform on a par with their private-sector counterparts.

Deposit insurance
Rationale for deposit insurance
      Most countries require banks to participate in a federal insurance program intended to protect bank deposit holders from losses that could occur in the event of a bank failure. Although bank deposit insurance is primarily viewed as a means of protecting individual (and especially small) bank depositors, its more subtle purpose is one of protecting entire national banking and payments systems by preventing costly bank runs and panics (panic).

      In a theoretical scenario, adverse news or rumours concerning an individual bank or small group of banks could prompt holders of uninsured deposits to withdraw all their holdings. This immediately affects the banks directly concerned, but large-scale withdrawals may prompt a run on other banks as well, especially when depositors lack information on the soundness of their own bank's investments. This can lead them to withdraw money from healthy banks merely through a suspicion that their banks might be as troubled as the ones that are failing. Bank runs can thereby spread by contagion and, in the worst-case scenario, generate a banking panic, with depositors converting all of their deposits into cash. Furthermore, because the actual cash reserves held by any bank amount to only a fraction of its immediately withdrawable (e.g., “demand” or “sight”) deposits, a generalized banking panic will ultimately result not only in massive depositor losses but also in the wholesale collapse of the banking system, with all the disruption of payments and credit flows any such collapse must entail.

How deposit insurance works
      Deposit insurance eliminates or reduces depositors' incentive to stage bank runs. In the simplest scenario, where deposits (or deposits up to a certain value) are fully insured, all or most deposit holders enjoy full protection of their deposits, including any promised interest payments, even if their bank does fail. Banks that become insolvent for reasons unrelated to panic might be quietly sold to healthy banks, immediately closed and liquidated, or (temporarily) taken over by the insuring agency.

Origins of deposit insurance
      Although various U.S. state governments experimented with deposit insurance prior to the establishment of the Federal Deposit Insurance Corporation (FDIC) in 1933, most of these experiments failed (in some cases because the banks engaged in excessive risk taking). The concept of national deposit insurance had garnered little support until large numbers of bank failures during the first years of the Great Depression revived public interest in banking reform. In an era of bank failures, voters increasingly favoured deposit insurance as an essential protection against losses. Strong opposition to nationwide branch banking (which would have eliminated small and underdiversified banks through a substantial consolidation of the banking industry), combined with opposition from unit banks (banks that lacked branch networks), prevailed against larger banks and the Roosevelt administration, which supported nationwide branch banking; this resulted in the inclusion of federal deposit insurance as a component of the Banking Act of 1933. Originally the law provided coverage for individual deposits up to $5,000. The limit was increased on several occasions since that time, reaching $100,000 in 1980.

      Deposit insurance has become common in banking systems worldwide; whereas only 17 countries had implemented such schemes prior to 1980, roughly 100 countries (including most of the Organisation for Economic Co-operation and Development (Economic Co-operation and Development, Organisation for) member countries) had done so by the early 21st century. The particulars of these schemes can differ substantially; some countries require coverage that amounts to only a few hundred U.S. dollars, while others offer blanket guarantees that cover nearly 100 percent of deposited moneys. In 1994 a uniform deposit-insurance scheme became a component of the European Union's single banking market.

      Ironically, deposit insurance has the potential to undermine market discipline because it does nothing to discourage depositors from patronizing risky banks. Because depositors bear little or none of the risk associated with bank failures, they will often select banks that pay the highest non-risk-adjusted deposit rates of interest while ignoring safety considerations altogether. This can encourage bankers to attract more customers by paying higher rates of interest, but in so doing, the banks must direct their business toward loans and investments that carry higher potential returns but also greater risk. In extreme cases losses from risky investments may even bankrupt the deposit insurance program, causing deposit guarantees to be honoured only through resort to general tax revenues. This was, in essence, what happened in the United States Savings and Loan crisis of the 1980s, which bankrupted the Federal Savings and Loan Insurance Corporation set up during the New Deal.

      Most countries insure bank deposits up to a certain amount, with few offering blanket deposit coverage (i.e., 100 percent of the amount any depositor holds with a bank). As in the United States, limited deposit insurance coverage is also the rule in South Korea, Japan, Ecuador, and Colombia. Although the regulatory authorities of Thailand, Indonesia, and Malaysia instituted blanket deposit guarantees in the midst of the 1997 financial crises, the countries reverted to limited coverage not long thereafter.

The principles of central banking (central bank)
      Central banks maintain accounts for, and extend credit to, commercial banks and, in most instances, their sponsoring governments, but they generally do not do business with the public at large. Because they have the right to issue fiat money, most central banks serve as their nations' (or, in the case of the European Central Bank, several nations') only source of paper currency. The resulting monopoly of paper currency endows central banks with significant market influence as well as a certain revenue stream, which is known as seigniorage, after the lords or seigneurs of medieval France who enjoyed the privilege of minting their own coins. (See also droit du seigneur (seigneur, droit du).)

      Contemporary central banks manage a broad range of public responsibilities, the first and most familiar of which is the prevention of banking crises. This responsibility involves supplying additional cash reserves to commercial banks that risk failure due to extraordinary reserve losses. Other responsibilities include managing the growth of national money stocks (and, indirectly, fostering economic stability by preventing wide fluctuations in general price levels, interest rates, and exchange rates), regulating commercial banks, and serving as the sponsoring government's fiscal agent—e.g., by purchasing government securities.

The origins of central banking
      The concept of central banking can be traced to medieval public banks. In Barcelona the Taula de Canvi (Municipal Bank of Deposit) was established in 1401 for the safekeeping of city and private deposits, but it was also expected to help fund Barcelona's government (particularly the financing of military expenses), which it did by receiving tax payments and issuing bonds—first for Barcelona's municipal government and later for the larger Catalan government. The Taula was not permitted to lend to any other entity. During the 1460s, however, excessive demands for lending caused the Taula to suspend the convertibility of its deposits, and this led to its liquidation and reorganization.

      The success of later public banks generally depended upon the extent to which their sponsoring governments valued long-term bank safety over loan flexibility. During the 17th and 18th centuries the Amsterdamsche Wisselbank was an especially successful example. The bank's conservative lending policy allowed it to maintain reserves that fully covered its outstanding notes and thereby rendered it invulnerable even to the major panic provoked by Louis XIV's unexpected invasion of the Netherlands in 1672. Although the Wisselbank had not been required to maintain 100 percent backing for its notes prior to 1802, its reserves shrank and its reputation suffered after it granted large-scale loans to the Dutch East India Company and the Dutch government.

 The Bank of England (England, Bank of), founded in 1694 for the purpose of advancing £1.2 million to the British government to fund its war against France, eventually became the world's most powerful and influential financial institution. It was the first public bank to assume most of the characteristics of modern central banks, including acceptance, by the late 19th century, of an official role in preserving the integrity of England's banking and monetary system (as opposed to merely looking after its own profits). By 1800 the Bank of England had become the country's only limited-liability joint-stock bank, its charter having denied other banks the right to issue banknotes (then an essential source of bank funding). Its size and prestige encouraged deposits from other banks and thereby streamlined the process of interbank debt settlement and confirmed the Bank of England's status as the “bankers' bank.”

      There were cracks, however, in the Bank of England's near-monopoly power. Although private banknotes had ceased to circulate in London by 1780, they survived in the provinces, where the Bank of England was prohibited from establishing branches. Following the Panic of 1825, a sharp economic downturn associated with a steep decline in commodities prices, dozens of county banks risked insolvency and failure. The government responded by rescinding the prohibition on joint-stock banking, though only for banks located at least 65 miles (105 km) from the centre of London. The same reform also allowed the Bank of England to set up provincial branches, but this last measure did not prevent the establishment of almost 100 joint-stock banks of issue between 1826 and 1836. The Bank of England's monopoly was thus partially infringed. Two further measures, however, ultimately served to enhance its power, causing other banks to rely upon it as a source of currency for their routine needs as well as during emergencies. An 1833 act made Bank of England notes legal tender for sums above £5, which strengthened the tendency for the nation's metallic reserves to concentrate in one place; and Peel's Act of 1844 (formally known as the Bank Charter Act) in turn awarded the Bank of England an eventual monopoly of paper currency by fixing the maximum note issues of other banks at levels outstanding just prior to the act's passage while requiring banks to give up their note-issuing privileges upon merging with or being absorbed by other banks.

      In England the passage of Peel's Act marked a practical victory for proponents of currency monopoly over those who favoured “free banking”—that is, a system in which all banks were equally free to issue redeemable paper notes. The free bankers maintained that Peel's Act allowed the Bank of England to exercise an unhealthy influence upon the banking system and deprived other banks of the strength and flexibility they needed to tide themselves through financial crises. Proponents of currency monopoly, on the other hand, favoured having one bank alone bear ultimate responsibility both for preserving the long-term integrity of the currency and for preventing—or at least containing—financial crises. Although he himself favoured free banking, Walter Bagehot (Bagehot, Walter), then editor of The Economist (Economist, The) magazine, played a key role in shaping the modern view of central banks as essential lenders of last resort. In the book Lombard Street (1873), he outlined the critical responsibilities of monopoly banks of issue (such as the Bank of England) during episodes of financial crises, and he emphasized the need for such banks to put the interests of the economy as a whole ahead of their own interests by keeping open lines of credit to other solvent but temporarily illiquid banks. These concepts of central banking led to the establishment of similar institutions in France, Germany, and elsewhere.

Modern developments
 In the United States, state banking laws prohibiting branch banking and Civil War-era restrictions on note issuance rendered the banking system vulnerable to periodic crises. The crises eventually gave rise to a banking reform movement, the ultimate outcome of which was the passage of the Federal Reserve Act in 1913 and the establishment of the Federal Reserve System.

      After 1914 central banking spread rapidly to other parts of the world, and by the outbreak of World War II most countries had adopted it. The exceptions were the European colonies, which tended to rely on alternative currency arrangements. When they achieved independence after the war, however, most of them adopted central banking. After the 1970s several nations that had experienced recurring bouts of hyperinflation chose to abandon their central banking arrangements in favour of either modified currency-board-like systems—as did Argentina from 1991 to 2002—or official “dollarization” (that is, the use of Federal Reserve dollars in lieu of their own distinct paper currency)—as did Ecuador in 2000.

      The worldwide spread of central banking during the 20th century coincided with the worldwide abandonment of metallic monetary systems, meaning that central banks effectively replaced gold and silver as the world's ultimate sources of base money. Central banks are therefore responsible for supplying most of the world's circulating paper currency, supplying commercial banks with cash reserves, and, indirectly, regulating the quantity of commercial bank deposits and loans.

Influence of central banks
      The chief feature that distinguishes central banks from commercial banks is their ability to issue irredeemable or “fiat” paper notes, which in most nations are the only available form of paper currency and the only form of money having unlimited legal-tender status. Besides being held by the general public, central bank notes also serve, together with central bank deposit credits, as the cash reserves of commercial banks. It is the central banks' monopoly of paper currency and bank reserves that allows them to exercise control over the total supply of money (including commercial bank deposits) available in the economies over which their monopoly privileges extend. By altering national money stocks, central banks indirectly influence rates of spending and inflation and, to a far more limited extent, rates of employment and the production of goods and services. Central banks also can influence the fate of individual banks, and indeed the stability of the banking industry as a whole, by granting or refusing emergency assistance in their role as lender of last resort. Finally, central banks typically take part in the regulation of commercial banks. In this capacity they may enforce a variety of rules governing such things as cash reserve ratios, interest rates, investment portfolios, equity capital, and entry into the banking industry.

Monetary control
      Central banks can control national money stocks in two ways: directly, by limiting their issues of paper currency, and indirectly, by altering available supplies of bank reserves and thereby influencing the value of the deposit credits that banks are capable of maintaining. Generally speaking, however, control is secured entirely though the market for bank reserves, with currency supplied to banks on demand in exchange for existing reserve credits.

Open-market operations (open-market operation)
      In most industrialized nations the supply of bank reserves is mainly regulated by means of central bank sales and purchases of government securities, foreign exchange, and other assets in secondary or open asset markets. When a central bank purchases assets in the open market, it pays for them with a check drawn upon itself. The seller then deposits the check with a commercial bank, which sends the check to the central bank for settlement in the form of a credit to the bank's reserve account. Banking system reserves are thus increased by the value of the open-market purchase. Open-market asset sales have the opposite consequence, with the value of checks written by securities dealers being deducted from the reserve accounts of the dealers' banks. The principal merit of open-market operations as an instrument of monetary control is that such operations allow central banks to exercise full control over outstanding stocks of basic money.

Minimum reserve requirements
      Two other instruments of monetary control of considerable importance are changes in mandated bank reserve requirements (minimum legal ratios of bank cash reserves to deposits of various kinds) and changes in the discount rate (the interest rate a central bank charges on loans made to commercial banks and other financial intermediaries). Changes in reserve requirements work not by altering the total outstanding value of bank reserves but by altering the total value of deposits supported by available cash reserves. Although reserve-requirement changes are capable in principle of accomplishing any desired money-stock adjustment, central banks have tended to rely less upon such changes while becoming more reliant upon open-market operations, largely because the effects of reserve-requirement changes on the money supply are less predictable than those of specific open-market operations but also because regulators, including many central bank authorities, have become increasingly inclined to view legally mandated reserve requirements as an unnecessary source of inefficiency in the banking system.

      The role of discount-rate changes is frequently misunderstood by the general public. Instead of purchasing assets on the open market, a central bank can purchase assets directly from a commercial bank. Traditionally such direct purchasing was known as “discounting,” because assets were acquired at a discount from their face or maturity value, with the discount rate embodying an implicit rate of interest. Today central bank support to commercial banks often takes the form of outright loans, even in systems (such as that of the United States) in which official central bank lending rates continue to be referred to as “discount” rates.

      Confusion arises because it is often the case that, in setting their own discount rates, central banks are able to influence market lending rates. In practice, most central banks supply relatively little base money through their discount windows, often restricting their discount or lending operations mainly to troubled banks but even denying funds to some of those. Consequently, there may be no connection at all between the rates central banks charge commercial banks and other (including commercial-bank) lending rates. Some central banks have contributed to misunderstandings by using changes in their discount rates as a means of signaling their intention either to increase or to reduce the availability of bank reserves, with the actual easing or tightening of bank reserve market conditions being accomplished, more often than not, by means of open market operations.

inflation targets
      Although most central banks (at least those not bound by a fixed exchange-rate commitment) continue to pursue a variety of objectives, economists generally believe that their principal aim should be long-term price stability, meaning an annual rate of general price inflation that is within the range of 0 to 3 percent. While other popular monetary policy objectives, including the financing of government expenditures, combating unemployment, and “smoothing” or otherwise regulating interest rates, are not necessarily at loggerheads with this goal, failure to subordinate such objectives to that of price-level stability has often proved to be a recipe for high inflation.

Influence on market rates of interest
      It is sometimes assumed that, by setting their own discount rates, central banks are able to influence, if not completely control, general market lending rates. In truth, most central banks supply relatively little base money in the form of direct loans or discounts to commercial banks. Central banks wield the greatest influence on rates that banks charge each other for short-term, especially overnight, funds. In some countries overnight interbank lending rates (such as the Federal Funds Rate in the United States, the London Interbank Offered Rate, or LIBOR, in England, and the Tokyo Interbank Offered Rate, or TIBOR, in Japan) function as important indirect guides to the central bank's monetary policy. Yet even in this respect the ability of central banks to influence inflation-adjusted interest rates is very limited, especially in the long term.

“Last resort” lending
      In its role as a lender of last resort, a central bank offers financial support to individual banking firms. Central banks perform this role to prevent such banks from failing prematurely and, more important, to prevent a general loss of confidence that could trigger widespread runs on a country's banks.

      Such a banking panic can involve large-scale withdrawals of currency from the banking system, which, by exhausting bank reserves, might cause the banking system to collapse, depriving firms of access to an essential source of funding while making it extremely difficult for the central bank to steer clear of a deflationary crisis. By standing ready to provide aid to troubled banks and thereby assuring depositors that at least some of the economy's banking firms are in no danger of failing, central banks make the challenge of monetary control easier while maintaining the flow of bank credit.

  Contemporary banking has been influenced by two important phenomena: deregulation and globalization (globalization, cultural), the latter having been a crucial driving force behind the former. A movement of deregulation gained momentum in the 1980s, when governments around the world began allowing market forces to play a larger role in determining the structure and performance of their banking systems. Deregulation was supported by an ideological current favouring privatization. At the same time, technological advances, especially in information processing and communications, eroded national financial-market boundaries by making it easier to obtain banking services from foreign or offshore banks, especially as offshore banking became a closer substitute for banking with domestic firms. The globalization of the banking industry soon followed in the form of cross-border bank mergers and the development of multinational banking corporations such as ABN AMRO, ING Group, and HSBC (HSBC Holdings PLC).

      By the early 21st century it had become possible for almost anyone to hold offshore dollar deposits in Luxembourg, The Bahamas, the Cayman Islands, and elsewhere and to initiate transactions electronically. The breakdown of borders motivated banks (particularly larger banks) to base their operations in countries with minimal regulations and low taxes.

 Consolidation has been a notable trend in banking, both within particular countries and across national borders. Mergers and acquisitions have reduced the number of banks worldwide, even as banking facilities and the availability of banking services have grown through ATMs, online banking, and branch banking. This trend has been especially visible in the United States, where the removal of restrictions on branch banking caused the number of banks to decline from more than 14,000 in the mid-1980s to fewer than 8,000 in the early 21st century. Beginning in the 1990s, the European Union has also witnessed a considerable degree of banking consolidation, thanks to an impressive number of bank mergers and acquisitions.

      Deregulation and breakthroughs in telecommunications have also diminished the influence of conventional commercial banks relative to other kinds of financial firms. In their place, diversified financial firms (that is, firms combining conventional banking, insurance, and investment services) have gained support and regulatory favour, especially in industrialized nations. Such changes have been least apparent in Europe, where such mingling has long been practiced under the rubric of universal banking.

 Banking services have also been extended to the poor, especially through the rise of microcredit associations. As developed in 1976 by the Grameen Bank of Bangladesh, microcredit associations have provided small loans (“microloans”) to millions of poor persons. Instead of relying upon collateral, as conventional banks do, to secure their loans, microcredit institutions rely upon their borrowers' membership in village-based peer groups that are collectively responsible for loan repayments. Remarkably, default rates for the Grameen Bank have been far lower than those for traditional banks. In 2006 Grameen and its founder, Muhammad Yunus (Yunus, Muhammad), were awarded the Nobel Prize for Peace.

      The relative importance of conventional banks has also declined as a result of expanding opportunities for business firms to raise funds by issuing their own bonds (including low-grade junk bonds) and shares. Globalization has contributed to this trend by making it easier for firms to market their securities abroad—a development that was especially beneficial for firms in countries that lacked sophisticated financial infrastructure.

      In response to competitive pressures, conventional banks increased their involvement in securities-related activities and began offering other nontraditional services. Some banks issued credit cards (credit card) or acquired large credit-card-processing operations. Many developed facilities for online banking and for point-of-sale debit-card (debit card) payments as well as for digital cash and smart cards, which could be used even by persons without bank accounts.

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); 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). More recent and reliable in its economics is Howard Bodenhorn, State Banking in Early America: A New Economic History (2003). 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 origins of central banking are discussed in Vera C. Smith, The Rationale of Central Banking (1936, reprinted in 1990 as The Rationale of Central Banking and the Free Banking Alternative. Rondo E. Cameron et al., Banking in the Early Stages of Industrialization: A Study in Comparative Economic History (1967), is a classic treatment of banking and economic development.

The business of banking and bank regulation
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). 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. Shelagh A. Heffernan, Modern Banking (2005), covers theory and practice in banking; and James R. Barth, Gerard Caprio, and Ross Levine, Rethinking Bank Regulation: Till Angels Govern (2006), assesses the effects of regulatory policies on banks around the world. Ed.

▪ seafloor feature
      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 (oceanic plateau). Banks whose tops rise close enough to the sea surface to be hazardous to shipping are called shoals (shoal). Some banks provide favourable conditions for marine life and are therefore important fishing grounds—e.g., the Grand Banks of Newfoundland.

* * *

Universalium. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • Bank [2] — Bank (Hdlgsw.), eine auf Rechnung mehrerer Personen od. des Staates errichtete Anstalt, welche mit Geld Geschäfte macht, d.h. gegen Hinterlegung von Geld, Werthpapieren od. werthvollen Gegenständen od. auch gegen Bürgschaft Credit gewährt, den… …   Pierer's Universal-Lexikon

  • bank — / baŋk/ n: an organization for the custody, loan, or exchange of money, for the extension of credit, and for facilitating the transmission of funds branch bank: a banking facility that is a separate but dependent part of a chartered bank; esp: a… …   Law dictionary

  • Bank — [bæŋk] noun BANKING ORGANIZATIONS The Bank the Bank of England, Britain s central bank: • The Bank is worried that strong demand for labour could lead to higher wages and prices. * * * Ⅰ …   Financial and business terms

  • bank — bank; bank·man; bank·roll·er; bank·rupt·cy; bank·sku·ta; can·ta·bank; em·bank; em·bank·ment; in·ter·bank; maas·bank·er; moun·te·bank·ery; bank·a·ble; bank·rupt; moun·te·bank; non·bank; bank·abil·i·ty; bank·skoi·te; hand·bank·er; sal·tim·bank; …   English syllables

  • bank — bank1 [baŋk] n. [ME banke < MFr banque < OIt banca, orig., table, moneylenders exchange table < OHG bank, bench: see BANK2] 1. an establishment for receiving, keeping, lending, or, sometimes, issuing money, and making easier the exchange …   English World dictionary

  • Bank — Bank, n. [F. banque, It. banca, orig. bench, table, counter, of German origin, and akin to E. bench; cf. G. bank bench, OHG. banch. See {Bench}, and cf. {Banco}, {Beach}.] 1. An establishment for the custody, loan, exchange, or issue, of money,… …   The Collaborative International Dictionary of English

  • Bank — (b[a^][ng]k), n. [OE. banke; akin to E. bench, and prob. of Scand. origin; cf. Icel. bakki. See {Bench}.] 1. A mound, pile, or ridge of earth, raised above the surrounding level; hence, anything shaped like a mound or ridge of earth; as, a bank… …   The Collaborative International Dictionary of English

  • bank — baŋk n a place where something is held available <data bank> esp a depot for the collection and storage of a biological product of human origin for medical use <a sperm bank> <an eye bank> see BLOOD BANK * * * (bangk) a stored… …   Medical dictionary

  • bank — Ⅰ. bank [1] ► NOUN 1) the land alongside or sloping down to a river or lake. 2) a long, raised mound or mass: mud banks. 3) a set of similar things grouped together in rows. ► VERB 1) heap or form into a mass or mound. 2) …   English terms dictionary

  • bank — {{/stl 13}}{{stl 8}}rz. mnż IIa, D. u {{/stl 8}}{{stl 20}} {{/stl 20}}{{stl 12}}1. {{/stl 12}}{{stl 7}} instytucja zajmująca się obrotem pieniędzmi: przyjmowaniem wkładów i wypłacaniem odsetek, udzielaniem kredytów, emisją banknotów,… …   Langenscheidt Polski wyjaśnień

  • Bank — Bank, v. t. [imp. & p. p. {Banked}(b[a^][ng]kt); p. pr. & vb. n. {Banking}.] 1. To raise a mound or dike about; to inclose, defend, or fortify with a bank; to embank. Banked well with earth. Holland. [1913 Webster] 2. To heap or pile up; as, to… …   The Collaborative International Dictionary of English

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”