banking

banking primarily the business of dealing in money and instruments of credit. Banks were traditionally differentiated from other financial institutions by their principal functions of accepting deposits—subject to withdrawal or transfer by check—and of making loans.

Types of Banks

Banks have traditionally been distinguished according to their primary functions. Commercial banks, which include national- and state-chartered banks, trust companies, stock savings banks, and industrial banks, have traditionally rendered a wide range of services in addition to their primary functions of making loans and investments and handling demand as well as savings and other time deposits. Mutual savings banks , until recently, accepted only savings and other time deposits, and offered limited types of loans and services. The fact that commercial banks were able to expand or contract their loans and investments in accordance with changes in reserves and reserve requirements further differentiated them from mutual savings banks, where the volume of loans and investments was governed by changes in customers' deposits. Membership in the Federal Deposit Insurance Corporation is compulsory for all Federal Reserve member banks but optional for other banks.

Other Financial Institutions

Types of financial institutions that have not traditionally been subject to the supervision of state or federal banking authorities but that perform one or more of the traditional banking functions are savings and loan associations , mortgage companies, finance companies, insurance companies, credit agencies owned in whole or in part by the federal government, credit unions, brokers and dealers in securities, and investment bankers. Savings and loan associations, which are state institutions, provide home-building loans to their members out of funds obtained from savings deposits and from the sale of shares to members. Finance companies make small loans with funds obtained from invested capital, surplus, and borrowings. Credit unions , which are institutions owned cooperatively by groups of persons having a common business, fraternal, or other interest, make small loans to their members out of funds derived from the sale of shares to members. The primary functions of investment bankers are to act as advisers to governments and corporations seeking to raise funds, and to act as intermediaries between these issuers of securities, on the one hand, and institutional and individual investors, on the other.

International Banks

The International Bank for Reconstruction and Development (World Bank) was organized (1945) to make loans both to governments and to private investors. The discharge of debts between nations has been simplified and facilitated through the International Monetary Fund (IMF), which also provides members with technical assistance in international banking. The former European Monetary Agreement also made possible the rapid discharge of debts and balance of payments obligations between nations. The European Central Bank (see European Monetary System ) was established in 1998 to help formulate the joint monetary policy of those European Union nations adopting a single currency.

General History

A simple form of banking was practiced by the ancient temples of Egypt, Babylonia, and Greece, which loaned at high rates of interest the gold and silver deposited for safekeeping. Private banking existed by 600 BC and was considerably developed by the Greeks, Romans, and Byzantines. Medieval banking was dominated by the Jews and Levantines because of the strictures of the Christian Church against interest and because many other occupations were largely closed to Jews. The forerunners of modern banks were frequently chartered for a specific purpose, e.g., the Bank of Venice (1171) and the Bank of England (1694), in connection with loans to the government; the Bank of Amsterdam (1609), to receive deposits of gold and silver. Banking developed rapidly throughout the 18th and 19th cent., accompanying the expansion of industry and trade, with each nation evolving the distinctive forms peculiar to its economic and social life.

History in the United States

Early Years to the Federal Reserve

In the United States the first bank was the Bank of North America, established (1781) in Philadelphia. Congress chartered the first Bank of the United States in 1791 to engage in general commercial banking and to act as the fiscal agent of the government, but did not renew its charter in 1811. A similar fate befell the second Bank of the United States, chartered in 1816 and closed in 1836.

Prior to 1838 a bank charter could be obtained only by a specific legislative act, but in that year New York adopted the Free Banking Act, which permitted anyone to engage in banking, upon compliance with certain charter conditions. Free banking spread rapidly to other states, and from 1840 to 1863 all banking business was done by state-chartered institutions. In many Western states it degenerated into "wildcat" banking because of the laxity and abuse of state laws. Bank notes were issued against little or no security, and credit was overexpanded; depressions brought waves of bank failures. In particular, the multiplicity of state bank notes caused great confusion and loss. To correct such conditions, Congress passed (1863) the National Bank Act, which provided for a system of banks to be chartered by the federal government.

In 1865, by granting national banks the authority to issue bank notes and by placing a prohibitive tax on state bank notes, an amendment to the act brought all banks under federal supervision. Most banks in existence did take out national charters, but some, being banks of deposit, were unaffected by the tax and continued under their state charters, thus giving rise to what is generally known as the "dual banking system." The number of state banks expanded rapidly with the increasing use of bank checks.

Recurrent banking panics caused by overexpansion of credit, inadequate bank reserves, and inelastic currency prompted Congress in 1908 to create the National Monetary Commission to investigate the banking and currency fields and to recommend legislation. Its suggestions were embodied in the Federal Reserve Act (1913), which provided for a central banking organization, the Federal Reserve System (see also central bank ).

Further Legislation

Since the establishment of the Federal Reserve system, federal banking legislation has been limited largely to detailed amendments to the National Bank and Federal Reserve acts. The Glass-Steagall Act of 1932 and the Banking Act of 1933 together formed an extensive reform measure designed to correct the abuses that had led to numerous bank crises in the years following the stock market crash of 1929. The Glass-Steagall Act prohibited commercial banks from involvement in the securities and insurance businesses. The Banking Act strengthened the powers of supervisory authorities, increased controls over the volume and use of credit, and provided for the insurance of bank deposits under the Federal Deposit Insurance Corporation (FDIC). The Banking Act of 1935 strengthened the powers of the Federal Reserve Board of Governors in the field of credit management, tightened existing restrictions on banks engaging in certain activities, and enlarged the supervisory powers of the FDIC.

Deregulation, Bank Failures, and New Technology

Several deregulatory moves made by the federal government in the 1980s diminished the distinctions among various financial institutions in the United States. Two major changes were the Depository Institutions Deregulation and Monetary Control Act (1980) and the Depository Institutions Act (1982), which allowed savings and loan associations to engage in often-risky commercial loans and real estate investments, and to receive checking deposits. By 1984, banks had federal support in buying discount brokerage firms, and commercial banks were beginning to acquire failed savings banks; in 1985 interstate banking was declared constitutional.

Such deregulation was blamed for the unprecedented number of bank failures among savings and loan associations , with over 500 such institutions closing between 1980 and 1988. The Federal Savings and Loan Insurance Corporation (FSLIC), until it became insolvent in 1989, insured deposits in all federally chartered—and in many state-chartered—savings and loan associations. Its outstanding insurance obligations in connection with savings and loan failures, over $100 billion, were transferred (1989) to the FDIC.

Further deregulation occurred in 1999, when Congress overhauled the entire U.S. financial system. Among other actions, the legislation repealed the Glass-Steagall Act, thus allowing banks to enter the insurance and securities businesses. Supporters predicted that the measure would permit U.S. banks to diversify and compete more effectively on an international scale. Opponents warned that this deregulation could lead to failures of many financial institutions, as had occurred with the savings and loans.

In the last decades of the 20th cent., computer technology transformed the banking industry. The wide distribution of automated teller machines (ATMs) by the mid-1980s gave customers 24-hour access to cash and account information. On-line banking through the Internet and banking through automated phone systems now allow for electronic payment of bills, money transfers, and loan applications without entering a bank branch.

Bibliography

See G. G. Munn, Encyclopedia of Banking and Finance (8th rev. ed. 1983); B. J. Klebaner, American Commercial Banking (1990); L. Schweikart, ed., Banking and Finance, 1913-1989 (1990).

banking Commercial process providing a wide range of financial services, such as holding and transferring money, providing loans, and giving stability to the financial sector of the economy. There are a variety of sectors in the banking industry. Clearing banks in the UK and commercial banks in the USA deal with the public, as well as with small and medium-sized businesses and corporations; merchant banks or investment banks provide services to business and industry, such as investment loans or share flotations. In many countries there are other providers of banking services, such as insurance companies and credit card firms, as well as building societies in the UK and savings and loan associations in the USA. A country's central bank, sometimes under government control, is the bankers' bank and can be used to regulate an economy.

banking. A system of trading in money which involved safeguarding deposits and making funds available for borrowers, banking developed in the Middle Ages in response to the growing need for credit in commerce. The lending functions of banks were undertaken in England by money-lenders. Until their expulsion by Edward I in 1291, the most important money-lenders were Jews, since they were not bound by canon law which forbade usury. They were replaced by Italian merchants who had papal dispensations to lend money at interest. In the 13th cent. credit was essential to finance commerce and major projects. The most important was the wool trade but other examples included large buildings such as Edward's castles in north Wales. When Italians had their activities in England curtailed in the early 14th cent., they were replaced by English merchants and goldsmiths, whose rates of interest were sufficiently low to avoid the usury laws. These sources of banking activity were the mainstay of commerce until the later 17th cent.

Monarchs had borrowed from merchants and landowners for centuries. By the late 17th cent., constitutional changes, particularly the growth of parliamentary power over government expenditures, required a more regulated framework. The Bank of England, founded in 1694, gave the government and other users of credit access to English funds. Similar developments occurred in Scotland and Ireland. These banks remained without serious competition until the later 18th cent., when expanding commercial and manufacturing activities gave scope to merchants, brewers, and landowners to establish banks based on their own cash reserves. These commercial banks took deposits, made loans, usually for limited periods, and issued promissory notes whose value was backed by bullion in the vaults combined with a fiduciary issue which depended on the likely scale of withdrawals. Errors of judgement sometimes occurred and ‘runs on the bank’ took place when depositors feared for the security of their money and demanded its return.

Fluctuations in the value of money because of the return to a gold-based currency after the end of the Napoleonic wars (1815) precipitated a series of crises. To stabilize the currency the government eventually introduced the 1844 Bank Charter Act, which gave the Bank of England two functions, that of supervising the note issue as part of the currency and that of monitoring the activities of the banking system. Regulatory powers were put in place in 1845 to control banking in Scotland and Ireland.

From their earliest days, banks required loyal staff who did not accept bribes, steal money, or give information about accounts to unauthorized persons. Literate and numerate staff received high salaries, retirement pensions, and various privileges including holidays and social facilities. Their work required systematic record keeping which grew in volume and complexity during the 19th cent. when cheques replaced banknotes for many business transactions. In 1773 banks established the London Clearing House to process cheques rapidly.

In the 19th cent., overseas trade and the expanding British empire reinforced the place of London as a centre of merchant banking. The probity, knowledge, and skills of these specialist bankers attracted business from foreign firms and governments seeking loans in Britain. Some British firms employed merchant banks to arrange their supply of capital finance. This usually involved share or bond issues which were traded on the stock markets. Such arrangements made possible the rapid development of railways, heavy engineering, mines, and large commercial developments. Many of these merchant banks survive, including Rothschilds, Lazard Brothers, Baring, Kleinwort Benson, and Schroders. Internal commerce and trade were funded mainly by a larger number of separate local banks which, after the middle of the 19th cent., became consolidated into a much smaller number of banks covering much of England. Numbers continued to diminish so that by 1980 banking was dominated by four companies: Barclays, Lloyds, Midland, and National Westminster.

London's dominance as the banking centre, not only of Britain but of the financial world, was not challenged until the 20th cent. with the growth of competing international economies such as the USA and Japan. None the less, London remains a major centre of merchant banking.

Within Britain, banking has been characterized, largely because of technological innovation, by an increasingly sophisticated provision of traditional banking services and an expansion of services associated with consumer credit. The business of safeguarding and lending money is often arranged through machine-readable cards and continuous access by telephone. Since the Financial Services Act of 1986, banks face more competition with many banking services being provided by building societies, trustee savings banks, and the Post Office.

Ian John Ernest Keil