Bank

• 1. Introduction

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  A bank issues new money the moment it makes a loan. That single act sits at the heart of an institution that accepts deposits from the public and creates a demand deposit. Lending can happen directly, or indirectly through capital markets. Because this matters so much to financial stability and a country's economy, most governments regulate banks heavily.

  The word itself once meant a piece of furniture. It came into Middle English from the Middle French banque, traced back to Old Italian banco for table, and Old High German banc for bench or counter. Florentine bankers worked atop desks covered by green tablecloths, and the bench became the name for the whole trade.

  How did goldsmiths storing metal in London vaults become creators of money? Why does a bank legally own the cash you hand it? And how did three American banks fail in March 2023 within a span of two weeks? The answers run from medieval pilgrims to fractional reserves to a crisis still fresh in memory.

• 2. From Pilgrims To The Medici

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  The Knights Templar ran the first recorded private banks in Europe. They guarded pilgrims traveling to Jerusalem, who carried large sums and feared robbers. A pilgrim could exchange money at a Templar stronghold for a receipt, then withdraw funds at other strongholds along the route. The order offered this from the 12th century until its disbandment in the early 14th century.

  Giovanni di Bicci de' Medici founded the Medici Bank in 1397, one of the most famous Italian banks. Before the Medici, elite families like the Bardi and Peruzzi dominated banking in 14th-century Florence, then spread branches across Europe. Modern banking grew in these prosperous Renaissance Italian city-states, building on credit and lending ideas rooted in the ancient world. Quasi-banking is thought to reach back to the end of the 4th millennium BCE.

  The Consell de Cent founded the earliest-known state deposit bank, the Taula de canvi de Barcelona, in 1401 at Barcelona. The Bank of Saint George followed in 1407 at Genoa. Certain banking dynasties shaped the trade over centuries: the Medicis, the Pazzi, the Fuggers, the Welsers, the Berenbergs, and the Rothschilds. The oldest retail bank still operating is Banca Monte dei Paschi di Siena, founded in 1472; the oldest surviving merchant bank is Berenberg Bank, founded in 1590.

• 3. The Goldsmiths Who Made Money

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  Merchants began storing their gold with the goldsmiths of London, who owned private vaults and charged a fee. For each deposit of precious metal, a goldsmith issued a receipt certifying its quantity and purity. At first these receipts could not be assigned. Only the original depositor could collect the goods.

  Goldsmiths gradually started lending money on behalf of depositors. Promissory notes, which became banknotes, were issued for money deposited as a loan to the goldsmith. Since the notes were payable on demand but the loans repaid over longer periods, this was an early form of fractional-reserve banking. The notes turned into an assignable instrument that circulated as a safe, convenient form of money.

  The Bank of England originated the permanent issue of banknotes in 1695. The Royal Bank of Scotland established the first overdraft facility in 1728. Lubbock's Bank set up a bankers' clearing house in London by the early 19th century, letting multiple banks clear transactions. The Rothschilds financed the British government's purchase of Suez canal shares in 1875. By the 19th century, money paid into a bank had become a mere loan, with the bank bound to return an equivalent sum on demand. As one ruling put it, money paid into a bank ceases to be the money of the principal and becomes the money of the banker.

• 4. What A Bank Actually Does

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  Banks act as payment agents by running checking and current accounts, paying checks customers draw, and collecting checks deposited. They move money through other methods too: Automated Clearing House, wire transfers, EFTPOS, and automated teller machines. They borrow by accepting deposits and issuing debt securities such as banknotes and bonds, and they lend through advances, installment loans, and marketable debt securities.

  Reaching customers happens across many channels. There is in-person branch banking, ATM banking, banking by mail, online and mobile banking, telephone banking with an automated attendant or operator, and video banking over a remote audio connection. A relationship manager visits private or business clients at home, while a Direct Selling Agent works on contract to grow the customer base.

  Charging interest on lent capital is traditionally the most significant way banks make money. The profit comes from the spread between what a bank pays for deposits and what it charges on loans. Lending profits have historically been cyclical, swinging with the economic cycle and the strength of borrowers. To steady their performance, banks have leaned more on fees and financial advice, which form a more stable revenue stream.

• 5. Profit, Cards, And Fintech

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  The Gramm-Leach-Bliley Act let banks again merge with investment and insurance houses. That merger enabled cross-selling and answered consumer demand for one-stop shopping. American banks have taken many such measures over the past 20 years to stay profitable as markets shifted. They also expanded risk-based pricing from business lending into consumer lending, charging higher rates to riskier borrowers to offset losses from bad loans.

  Debit cards, prepaid cards, smart cards, and credit cards widened the methods of payment available to the public. They let people make transactions conveniently and smooth their spending over time. In some countries with underdeveloped financial systems, people still deal strictly in cash, sometimes carrying suitcases of cash to buy a home. Banks earn from cards through interest, holder fees, and transaction fees charged to retailers who accept them.

  Pressure from fintechs has pushed banks toward new business models. These include freemium, monetization of data, white-labeling of banking and payment applications, and cross-selling complementary products. Easy credit carries its own danger: consumers may mismanage their resources and pile up excessive debt.

• 6. Risk, Crisis, And The 2008 Reckoning

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  Credit risk is the danger that a borrower will not pay as promised. Banks also face liquidity risk, market risk, operational risk, reputational risk tied to trustworthiness, and macroeconomic risk from the wider economy. Bank capital consists mainly of equity, retained earnings, and subordinated debt, and capital requirements set the framework for managing the balance sheet. Assets and capital are categorized in a standardized way so they can be risk weighted.

  Bank crises recur whenever risks emerge across the whole sector. The bank run of the Great Depression, the U.S. Savings and Loan crisis of the 1980s and early 1990s, the Japanese banking crisis of the 1990s, and the sub-prime mortgage crisis of the 2000s all followed this pattern. Banks that failed during the 2008 crisis held, on average, four times more brokered deposits as a share of deposits than the average bank.

  Assets of the largest 1,000 banks grew 6.8% in the 2008-2009 financial year to a record US$96.4 trillion, while profits fell 85% to US$115 billion. EU banks held the largest share at 56%, down from 61%. After the 2008 crisis, regulators required banks to issue Contingent convertible bonds, hybrid securities that absorb losses when a bank's capital drops below a set level. The 2023 global banking crisis came next: in March 2023, three U.S. banks failed, and within two weeks several of the world's largest banks failed or were shut by regulators.

• 7. A World Of Banks, A Global Reach

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  Land development banks make long-term loans, and the first one started at Jhang in Punjab in 1920 to develop land and raise agricultural production. The roster of bank types runs wide: commercial banks, community banks, community development banks, credit unions and co-operative banks owned by depositors, postal savings banks, offshore banks, ethical banks, and internet-only banks with no branches. Private banks once required a minimum of US$1 million to open an account, though many have lowered the bar to US$350,000.

  The United States has the most banks by institution, 5,330 as of 2015, and possibly the most branches at 81,607. China's top four banks held over 67,000 branches as of November 2009, with the Agricultural Bank of China alone running more than 24,000. Between 1985 and 2018 banks took part in around 28,798 mergers or acquisitions worth roughly 5,169 billion USD, with value peaking near 460 billion USD in 1999 and again in 2007.

  Citigroup and HSBC both built large retail networks across many countries in the 1980s, aiming to become global consumer brands. The bet was that globalization would create crowds of customers regularly crossing borders for work and play. According to Wells Fargo, that global consumer customer never materialized. Citigroup began exiting retail banking outside its core U.S. market in 2021, HSBC left the U.S. retail market in 2022, and in 2023 it put retail operations in a dozen other countries under review for sale or closure.